Gov. Tim Walz’s $733 million increase in school funding depends on his proposed changes in the gas tax, in federal corporate and individual income tax conformity, and the medical provider tax. In the first two weeks of March, Gov. Walz’s transportation, tax, and health and human services bills were introduced and heard in House committees.  All address state revenue in the General Fund that under girds his proposed $733 million in education funding.

Transfer to Gas Tax

In the 2017 Special Session, the legislature and Gov. Mark Dayton agreed to transfer funds from the State Treasury to the Highway User Tax Distribution Fund (HUTDF) at the rate of $12.1 million per month starting July 1, 2019.  This totals $145.6 million per year, $291 million in the biennium, and is permanent law (MS 297A.94 (g)).  This equates to about the price of 1.5 percent on the formula.

These amounts are transferred from the general fund into the HUTDF regardless of how much revenue is generated by the motor vehicle repair parts sales tax. The provision is written this way apparently because the actual amount generated by this tax in future years is not known, so a dollar amount was written in instead of the amount generated by the tax. So, while this provision is couched in language that makes it looks like the transfer of revenue from motor vehicle repair parts sales tax, the amount actually transferred is independent of the amount generated by the tax.

Gov. Walz’s transportation proposal (HF2403/SF2360 ) repeals this transfer and increases the gas tax $.05 every six months beginning Oct 1, 2019 through March 1, 2021 for a total $0.20.  According to Transportation Commissioner Margaret Kelliher, seven cents of the proposed gas tax increase is required to reverse this drain on the general fund. While this reverse-shift may be a hard argument, Commissioner Kelliher pointed out that Greater Minnesota gets more per capita transportation funding.

Federal Tax Conformity

Gov. Walz’s tax bill (HF2125/SF2411) addresses federal tax conformity and raises an estimated $696 million in the ‘20-21 biennium and $800 m in the ’21-22 biennium. These increases come from changes to Minnesota’s corporate and individual income taxes in response to the federal income tax reductions made in December 2017. Walz proposes to end the practice of starting Minnesota income taxes with the federal taxable income.

“There is benefit to business from the simplicity [of this change],” Revenue Commissioner Cynthia Bauerly said.  What business groups oppose are increases on foreign earnings and the removal of many business tax deductions, some of which were removed in the federal tax overhaul as well. Learn more the Minnesota Department of Revenue’s HF 2015 State Tax Analysis.

MREA Executive Director Fred Nolan testified in favor of the Governor’s Tax bill in the House Tax Committee, emphasizing that Greater Minnesota students depend on state aid.  There is on average a $683 per pupil funding gap in operating referendum revenue which is based on property taxes despite rural and metro homeowners and businesses having nearly the same tax rates. cGreater Minnesota school districts cannot go to their local taxpayers to make up this difference and depend more on state aid.

Therefore the state needs to raise the revenue to increase the education formula, extend the existing early learning seats and address the special education cross subsidy. View the issue brief on this revenue gap and need for state funding of schools.

Medical Provider Tax

Gov. Walz also proposes to extend the provider tax that pays for Minnesota Care in his Health and Human Services proposal (HF2184/SF2302).  Learn more. Watch Sen. Abler and Rep. Liebling debate the issue on last Friday’s TPT Almanac (about 10 minutes into broadcast).

The provider tax is set to expire at the end of 2019 and estimates show a $1 billion deficit will emerge in the Health Care Access Fund by the 2022-23 biennium if that happens. Major cuts would have to take place to state funded health care access for low income people or general fund dollars would be needed to backfill the loss or some combination of the two would be needed to address this shortfall.

What’s Next?

It will be important for those interested in Greater Minnesota education to follow these debates closely.  These will be major partisan and interest group fights this session.

The budget surplus has shrunk to $1 billion without any inflation and actually turns negative in the next biennium.  View February Revenue Forecast.

These tax proposals provide the ongoing revenue on which the ongoing 3 and 2 percent formula increases depend.  Greater Minnesota education advocates should be prepared to raise voices in support of all or most of the proposals in order to put our learners first.