Minnesota will get $2.8 billion from federal COVID relief. Will it bridge budget divide?

Minnesota will get $2.8 billion in federal coronavirus relief funding, even more than previously expected, and the money will start arriving as state lawmakers face crunch time in budget negotiations.

The federal aid is enough to wipe out the total spending differences between Gov. Tim Walz, the House and the Senate. What's unclear is whether Walz and lawmakers are ready to give up long-held policy positions to strike a deal.

President Joe Biden's administration will send out half the money this month and the rest a year from now, the U.S. Treasury department said in guidance Monday.  

The $2.8 billion does not include money that will go to Minnesota counties, cities, schools and transportation entities. Twenty-one metropolitan cities will get $644 million, the guidance indicated. The feds did not specify the funding amounts for counties.

In Minnesota, Walz and lawmakers are negotiating budget differences with the Legislature facing a May 17 adjournment. The real deadline is June 30: if a budget doesn't pass by then, state government shuts down.

Walz and House Democrats have proposed tax increases on wealthy Minnesotans and corporations to fund new programs in education, child care and other areas. He did not take the tax hikes off the table when asked about the issue Monday afternoon.

"I’m not going to negotiate with myself," Walz told reporters at an event outside a St. Paul child care center. "We’ll end up using that federal money to take care of our children and take care of our small businesses and take care of our families. But that’s one time money."  

Republicans in the GOP-led Senate have rejected any tax increases, saying Minnesota has enough money between a projected budget surplus and the federal aid.

"There are zero reasons, absolutely none, to ask for more money from Minnesotans," Senate Majority Leader Paul Gazelka said in an emailed statement.

Treasury said Monday that states cannot use the money on broad tax cuts, though conformity to federal law is allowed. That allows Minnesota to create a tax break on $440 million of business Paycheck Protection Program loans and up to $10,200 of 2020 unemployment benefits.

The Republican-controlled Senate is pushing to wipe away the entire amount of PPP loans from state taxes, while Walz and House Democrats have proposed forgiving up to $350,000 in loans. The unemployment insurance issue is flipped: Democrats are seeking a tax break on the full $10,200 amount, while Senate Republicans have advanced legislation to forgive a portion of it.

"We can pass federal tax conformity, we can support our hospitals and front-line workers, we can fund our schools, and, critically, we can enact police reform and accountability legislation," House Speaker Melissa Hortman and Majority Leader Ryan Winkler said in an emailed statement.

Republicans have said they will only agree to a scaled-down, "lights-on" budget if Walz does not commit to letting the Legislature decide how to spend the $2.8 billion. Current state law allows Walz to decide how to spend federal money once the Legislature adjourns.

The federal funding comes from a $350 billion pot of money for states, which is itself part of the $2 trillion COVID stimulus package that Congress and the president approved in March. States are required to spend the money on pandemic-related impacts.