Governor Tim Walz’s supplemental budget proposal released last month included his administration’s tax priorities for the coming years.
His budget comes at a time of challenges and threats to Minnesotans’ health and economic well-being. Minnesota policymakers must respond to the sweeping federal tax and budget legislation known as H.R. 1. That bill makes deep cuts to basic needs services including Medicaid and food assistance through SNAP, and requires states to take more responsibility for providing and funding these key services.
Minnesota is also facing further federal threats to cut funding for crucial public services, and the need to respond to the humanitarian and economic costs from the federal immigration enforcement tactics through ICE’s Operation Metro Surge.
Walz’s tax plan includes some revenue-raising provisions, but also some significant tax reductions. The tax provisions as a package would decrease general fund revenue on net by $65 million in the current two year budget cycle (FY 2026-27) and increase revenue by $238 million in FY 2028-29, while also raising $241 million in dedicated funding over both biennia.
Sales tax rate reduction and base expansion
The governor’s proposal includes a sales tax reform package that would raise $79 million on net in FY 2026-27 and $243 million in FY 2028-29. The proposal is made up of two pieces: 1) it would cut the state’s general sales tax rate from 6.5 percent to 6.425 percent, which would lower the amount of sales taxes Minnesotans pay on purchases of currently taxable items; and 2) it would begin charging sales tax on some services, including legal, accounting, brokerage and trust services, and some bank service charges. Walz describes the goal as focusing on services utilized primarily by higher-income people.
This proposal is one of a number of recent ideas that seeks to extend sales tax to services as a step toward modernizing the tax code. Sales taxes historically have been applied primarily to goods but infrequently to services, and this has not kept up with changes in the economy in which services make up a growing share of consumer purchases.
Child and Dependent Care Tax Credit expansion
Walz’s budget proposes an expansion of $147 million in FY 2026-27 and $299 million in FY 2028-29 of the Child and Dependent Care Credit. This credit refunds a portion of what qualified families have paid for child care expenses so that parents can work or look for work. It is based on the federal Child and Dependent Care Tax Credit, with some important differences being that Minnesota’s version of this credit is fully available to lower-income families and eligibility is limited to families with incomes under about $90,000.
Walz proposes adopting recent changes to the federal Child and Dependent Care Tax Credit, plus substantially expanding it further. The proposed changes include:
- Increasing the credit amount families can qualify for through various changes in the formula to calculate the credit;
- Creating a larger credit (up to $3,000), for children under age 5, temporarily for tax years 2026 through 2033; and
- Significantly raising the income level at which families can qualify for the credit to $170,000.
Social media tax
A social media tax similar to a proposal considered in the Senate Tax Committee last year is a part of the governor’s proposal. Walz recommends that a tax be established for social media platforms with over 100,000 users, with increasing additional taxes on social media companies with more than 500,000 and more than one million users. The tax would raise $47 million in FY 2026-27 and $197 million in FY 2028-29.
Walz supports this kind of tax, arguing that social media companies are large corporations that are earning considerable profits, while workers bear the burden of rapid changes to industries due to emerging technologies. This proposal taxes the valuable data that social media companies collect from Minnesota users.
Unlike the similar 2025 Senate proposal, the governor’s proposal would dedicate funding from this tax to a special revenue fund for workforce development to address the expected workforce implications of AI.
Federal conformity to H.R. 1
Like other states, Minnesota uses many components of the federal tax code as a starting point for our state income and corporate taxes. When federal policymakers make decisions that could impact our state tax code, Minnesota policymakers must decide whether or not to adopt those changes. When a state adopts federal changes, that is called “conformity,” and when a state chooses not to adopt a provision, it is called decoupling. In making these decisions, policymakers must weigh the simplicity that can come with conforming with the federal tax code against other values such as fairness and the need to raise adequate revenues to fund public services.
Walz proposes conforming to some changes in H.R. 1 and rejects others. The governor’s budget asserts that conformity decisions were made to make tax-filing simpler and easier to administer. His entire conformity package would increase state general fund revenues by $4.2 million in FY 2026-27 and by $268 million in FY 2028-29.
Regarding income taxes paid by individuals and families, Walz proposes conformity provisions that cut taxes (such as those conforming to federal expansions of dependent care pre-tax accounts and the Child and Dependent Care Tax Credit), and some that would raise taxes (such as adopting a 0.5 percent floor that reduces the amount of charitable giving that taxpayers can deduct). Altogether, the total amount raised by Minnesota’s individual income tax would be largely unchanged.
In terms of taxes paid by businesses, again the governor proposes adopting some provisions that cut taxes and some that raise revenues, with the net impact keeping total business taxes about the same in FY 2026-27 and raising taxes by $264 million in FY 2028-29. Without getting too into the weeds, these proposals largely impact how much and when certain business expenses can be deducted to reduce the amount of profits subject to tax.
Walz also chooses not to replicate provisions in H.R. 1 that create specific federal tax benefits that are not technically conformity items but that some policymakers have suggested replicating at the state level. The governor chose not to replicate H.R. 1’s limited tax deductions for tip and overtime income, or deductions for seniors or certain auto loan interest.
Increased capacity for tax compliance
Walz also has two proposals to increase tax compliance and the integrity of the tax system:
- Increased capacity for the Minnesota Department of Revenue to conduct audits and ensure tax compliance by pass-through entities. Pass-through entities are businesses that pay taxes on their profits through the individual income tax of their owners and shareholders, rather than the corporate tax, because of the business structure they have chosen. Walz’s budget proposal states that the use of complex pass-through entities is growing, and that changes are needed to ensure tax compliance that contributes to a tax system that is transparent, accountable, and efficient. Increased capacity will come at a cost of $885,000 in FY 2026-27 and $3.7 million in FY 2028-29, with anticipated revenue raising of $4.3 million in FY 2028-29.
- Increased capacity in the Criminal Investigation Division for fraud prevention and enforcement. The governor’s proposal states that expanded capacity will “strengthen the state’s ability to prevent, detect, and prosecute tax fraud, protect taxpayer dollars, and uphold a fair and accountable tax system, and advance fiscal accountability statewide.” Expanding fraud prevention and enforcement will come at a cost of $927,000 in FY 2026-27 and $ 3.7 million in FY 2028-29.
Other tax provisions in the governor’s supplemental budget
- The governor’s supplemental budget includes a new firearm and ammunition tax, which would create a gross receipts tax of 10 percent for handguns and 11 percent on long guns and ammunition. The costs associated with this provision are $91,000 in FY 2026-27 and $340,000 in FY 2028-29 for the Department of Revenue’s administration of the new tax. The tax is expected to raise $9.3 million in FY 2026-27 and approximately $29 million in FY 2028-29.
- Other tax provisions include extending Minnesota’s pass-through entity tax, medical cannabis sales tax exemption reciprocity, a sustainable aviation fuel tax credit funding and policy package, and lifting the three-year timeline for historic tax credit projects. All of these have minimal impact to the state budget.
What’s next?
The governor’s tax package creates a starting point for negotiations with the Legislature about what tax policy changes to make and how they affect Minnesotans. Decisions about how much tax revenue the state should raise are directly connected to the state’s ability to fund essential public services and respond to Minnesotans’ needs.
We are glad the governor recognizes the need for the state to raise additional revenues by putting revenue-raising proposals in his budget.
Importantly, Walz does not propose replicating H.R. 1’s temporary tax breaks that propose to benefit everyday folks – such as exempting tips and overtime pay – that would not have helped most workers and make it harder to fund the services that they count on.
We urge state policymakers to take an even stronger revenue approach, which is needed to make up for the unprecedented federal funding cuts and harmful policy choices that have dramatically impacted health care, food support, and other services Minnesotans count on to be healthy and get by.