On March 17, Governor Walz unveiled his supplemental budget for the next four years. With a mix of tax increases, spending hikes, and spending cuts, the net impact of the governor’s budget on Minnesota’s long-term fiscal outlook appears minimal. However, the budget’s neutral bottom line hides various policy flaws worth discussing.
The good news: On net, Walz’s budget reduces the structural deficit by $372 million between 2026 and 2029. The plan also includes several proposals to roll back costly measures enacted in the 2023 session and targeted funding for IT modernization, which addresses a widely recognized need in Human Services.
The bad news: Walz’s budget barely makes a dent in the state’s multi-billion-dollar structural deficit. Moreover, most of the savings in his plan stem from new taxes, while the remainder depends entirely on system changes whose returns could fall below projections.
To improve affordability, Walz has proposed expanding the Child and Dependent Care tax credit. This change is unlikely to address high childcare prices but will further narrow the income tax base, worsening budget instability.
The details:
Heavy on fraud
Similar to the legislature, Walz’s budget provides funding for various anti-fraud initiatives. These include:
- $71 million to improve Medicaid oversight through things like “provider revalidation, background studies for high-risk providers, and oversight of Managed Care Organizations.”
- More than $40 million to establish the Office of the Inspector General.
- Over $3 million to expand the Medicaid Fraud Unit in the Attorney General’s office
- Nearly $10 million for program integrity updates in the Child Care Assistance Program (CCAP)
- More than $6 million to increase auditing capacity at Minnesota Management and Budget (MMB).
- More than $4 million to expand the Financial Crimes and Fraud Section
Some spending reductions
A significant portion of direct spending reductions in Walz’s budget result from changes that address rising spending in Medicaid by (partially) undoing some 2023 session spending increases.
For example, Walz has proposed reinstating parental fees in Medicaid for families with incomes exceeding 600 percent of the federal poverty level — roughly $217,000 for a family of four. This reverses a 2023 rule that eliminated cost-sharing for everyone.
Walz has also proposed to
- Reduce grants to disability services: also a partial reversal of the 2023 spending spree.
- Limit inflationary adjustments in the Disability Waiver Rate system. This also reverses a 2023 policy that accelerated spending growth on disability waivers.
- Reduce transit funding to the Metropolitan Council.
- Raise the county share for behavioral health fund spending to 50 percent.
Speculative savings
In addition to direct savings, the governor’s budget includes potential savings from enhanced Medicaid oversight.
Changes that strengthen “prepayment review, post-payment analysis, and continuous fraud detection” and “build modern analytics and data infrastructure,” for instance, are estimated to save $172 million between 2026 and 2029. Another $293 million will come from changes that curb overbilling. Together, these potential savings exceed the projected deficit reductions to result from Walz’s budget.
While these are commendable changes, there is a risk that savings could fall below projections, especially if existing practices, such as the state’s prepayment review, have already identified the low-hanging fruit.
New tax hikes
Walz wants to lower the state sales tax and expand the tax base to include professional services, such as attorneys and accountants. Separately, these are both good ideas. But when combined, they result in a tax increase of over $300 million from 2026 to 2029.
Last year, Walz introduced a similar proposal, which, as John Phelan explained, would have saved the average family about $42 a year in reduced sales taxes but imposed a $620 tax on professional services. Another tax on firearms and ammunition is estimated to cost $37 million over 2026-2029.
Outside the main budget, Walz has proposed a social media tax that could raise $244 million over the next four years. The revenue will be deposited into a special revenue fund managed by the Department of Employment and Economic Development (DEED) to support “workforce development initiatives targeted at workers who experience job loss due to artificial intelligence.”
Tax credits for affordability
To improve affordability, Walz has proposed expanding the Child and Dependent Care tax credit by
increasing the income threshold at which the credit begins to phase out, increasing the percentage of expenses taken into account for the credit, and increasing the maximum amount of eligible expenses for a young child under the age of five by an additional $3,000 for one young child and $6,000 for families with more than one young child for taxable years 2026 through 2033.
This will cost $442 million between 2026 and 2029.
By reducing tax liability for select low-income families, Walz’s proposal further narrows an already thin income tax base, making state revenue even more dependent on a small pool of high-income earners.
At the same time, these credits treat the symptom rather than the cause of high childcare prices. By subsidizing costs, Walz’s proposal will likely stimulate demand while supply remains constrained, driving prices higher.
Overall impact
In February, MMB recommended that, given the state’s structural deficit, the legislature pair spending increases with spending cuts. On the surface, Governor Walz’s supplemental budget has followed that recommendation.
However, upon closer analysis, more than 100 percent of the savings from Walz’s plan are attributable to new taxes and speculative savings.
