Walz, top lawmakers strike budget deal; tax breaks included, but no police changes

Gov. Tim Walz and top lawmakers struck a last-minute deal over the $52 billion state budget Monday, but they'll need a special session to pass it amid uncertainty over several key issues.

The agreement includes a $440 million tax break for business Paycheck Protection Program loans, and it forgives the first $10,200 of 2020 unemployment insurance. It boosts K-12 education funding, including an infusion of cash for summer school programming.

But it does not impose any new restrictions on police and fails to resolve the controversy around Walz's COVID-19 emergency powers. Lawmakers adjourned Monday afternoon hours before their constitutionally mandated deadline without passing any budget bills, meaning a special session is required in June to avoid a July 1 state government shutdown.

"I'm hopeful," Gov. Tim Walz told reporters at a news conference promoting the deal. "It's not the end. It's a big piece. It's a start."

The preliminary agreement is only the first step toward passing a budget. Top lawmakers are directing their committee chairs to reach policy deals by June 4 so staff can draft bills in time for a special session later in June.

Walz and lawmakers had been negotiating behind closed doors for two weeks but ran out of time to address the most controversial proposals. Those include police changes that Democrats are seeking in the wake of Derek Chauvin's murder conviction and the April death of Daunte Wright in Brooklyn Center. Also unresolved are Walz's emergency powers, which Republicans want to end.

"We've got to figure that out. It's still a thorny issue," Senate Majority Leader Paul Gazelka, R-East Gull Lake, said.

The deal uses federal stimulus money to balance the budget and gives the Legislature control over all but $500 million of the $2.8 billion in federal aid. Without a deal in place by the time lawmakers adjourned, Walz would have controlled the purse strings.

Under the agreement, the governor can spend $75 million of the federal money as early as Tuesday to expand summer school programs. Democrats who pushed for an increase in K-12 funding said their deal would save teachers who received layoff notices this spring.

"With the funding we have provided, they should be able to let personnel know they will be staffed up in the fall," said House Speaker Melissa Hortman, DFL-Brooklyn Park.

Walz and lawmakers agreed to $754 million in tax breaks. Of that amount, $409 million will be spent on a tax break for business PPP loans, while $235 million will forgive the first $10,200 in 2020 unemployment benefits for workers. The Legislature can decide where to direct the remaining $110 million.

Top lawmakers were uncertain if the Revenue Department could issue automatic refunds or if individual payers and businesses will have to refile if the Legislature ultimately passes the deal next month.  

The agreement comes too late for those who owe state income tax on Monday. Minnesota is one of a handful of states treating the loans and jobless benefits as income. The federal government forgave the money from federal income tax months ago.

"They were laid off during the pandemic, and (lawmakers) literally threw them under the bus and backed the bus over them today," House GOP Leader Kurt Daudt, R-Crown, told reporters.

The Capitol could look much different when lawmakers return for the June special session. Top lawmakers expect the fence that's surrounded the Capitol since May 2020 to come down soon.

Hortman and Gazelka said they would open the galleries in their respective chambers to the public once the building reopens. The Capitol has been closed since March 2020 because of the COVID-19 pandemic.