ST. PAUL, Minn. (AP) — Minnesota Gov. Tim Walz said Friday that his budget proposal will include tax rebates from the state’s enormous $17.6 billion budget surplus but conceded that the payments will be smaller that he once hoped.

The governor acknowledged that his proposal — which started out last year as $1,000 for individual filers and $2,000 for joint filers — has found only “lukewarm support” among his fellow Democrats so far. But he wouldn’t specify new figures ahead of his budget announcement set for Jan. 24.

“I think people are feeling inflation, even though it may be cooling a little bit,” Walz said in an interview with The Associated Press. “I think there’s a sense out there amongst Minnesotans, whether they’re conservative or liberal, that a little bit of the surplus could really help.”

The governor also said his budget will propose indexing state aid for school districts to inflation. He said he first disclosed that detail earlier in the day at a meeting with school board members and superintendents. That squares with the pledge he made in his second inaugural address Monday to make the largest investments in public education in Minnesota history.

Democrats took control of both houses of the Minnesota Legislature, which convened Tuesday, after flipping the Senate in the November elections. But even after winning the “trifecta” of the Senate, House and governor’s office, some differences among Democrats are starting to emerge.

House Speaker Melissa Hortman, of Brooklyn Park, and Majority Leader Jamie Long, of Minneapolis, made it clear at news conference Wednesday that a bigger priority for them is tax credits targeted at families of $3,000 per child age 5 or younger, up to a cap of $7,500. But Hortman also expressed confidence that her new tax committee chair, Rep. Aisha Gomez, of Minneapolis, and Walz’s new revenue commissioner, former House tax chair Paul Marquart, would be able to reach compromises.

Walz proposed big rebates last year when the projected surplus stood at a mere $9.25 billion. But the 2022 legislative session ended in partisan stalemates with most of that extra money left unspent. Senate Republicans held out for permanent tax cuts but lost their gamble when they lost their majority in November.

“I just want a tax rebate back to the people of Minnesota, to make life a little more affordable for them,” Walz said. “And I think there will be a form of that, coupled with, I think, tax relief especially targeted at the middle class.”

The governor said his budget will include “a version” of child tax credits, though it won’t be exactly the same as what the legislative leaders proposed.

And he said he’ll propose exempting more Minnesotans from income taxes on Social Security benefits, either totally or partially. About half of Minnesota Social Security recipients currently pay no tax on that income, he said, but he wants to keep the tax in place “for the very wealthiest Minnesotans.”

Most states don’t tax Social Security at all. Minnesota Republican — and even some Democratic — legislative candidates campaigned on eliminating the tax altogether. But Hortman warned that doing so could blow a big hole in future budgets.

Overall, Walz said he’s “super optimistic” about a productive legislative session under the new Democratic trifecta. And he said it’s ironic that the first bill expected to reach his desk, probably next week, will be one sought by Republicans last year to bring the state tax code into compliance with the federal tax code to make tax filing simpler.

“So far, so good,” he said.

By — Lakeland News