Republicans call it the “sick tax.” Gov. Tim Walz says that without it, many more people will get sick.

Minnesota’s 2% tax on most medical services, which has been around for decades, is headed for extinction at the end of this year, ending a $700 million a year revenue stream that the new DFL governor wants to cover health care for low-income patients, children and people with disabilities.

As Walz and the Republican-led Senate battle in the final weeks of the legislative session over schools, road spending and the $45 billion-plus budget, extending the provider tax remains one of the governor’s top priorities.

Meanwhile, Republicans were set to pass a health and human services budget bill Tuesday that does not include the provider tax and would seek to rein in costs, which Democrats said would endanger important programs for people with disabilities, low-income Minnesotans and the elderly.

For Walz, the math without that revenue is daunting: The state will spend about $7 billion on health and human service programs this year, which means that if the tax goes away, state government will eventually have to find a way to cut nearly 10% of that budget or find the money somewhere else.

Like so many issues at the Legislature, the health care provider tax is merely a skirmish in a broader ideological battle. For Republicans, the scheduled sunset of the tax is a prime opportunity to shrink government by $700 million a year. If Walz and his DFL allies in the Legislature want to keep the health programs in place, they argue, the Democrats should look for the money elsewhere, either in an estimated $1 billion surplus, or by making cuts to other programs.

Walz, working to pass his administration’s first budget, says extending the tax is “not negotiable.”

“I will not put the health of Minnesotans at risk,” he has said several times in recent weeks.

The Republican logic is that taxing health services makes them more expensive. Killing the tax, they argue, would reduce health care costs for most people.

GOP House Minority Leader Kurt Daudt, R-Crown, is fond of saying, “You can’t decrease health care costs by increasing health care costs.” Opponents of the tax argue that if a procedure costs $102 with the tax, then it will only cost $100 once the tax goes away, and state government will have successfully confronted perhaps its greatest short- and long-term challenge: medical inflation.

‘Like a balloon’

But Democrats and some medical industry officials who pay the tax say that’s not how health care costs work.

“The system is like a balloon. You squeeze one area, and it just pops up in another area,” said Wendy Burt, a spokeswoman for the Minnesota Hospital Association, in an e-mail. If fewer people have insurance, providers will wind up giving care without getting paid, she said.

A likely result, Burt added, is that doctors and other health providers will demand more from insurers, who will then pass the cost on to their customers — that is, the companies that provide Minnesotans with insurance through their jobs.

In the end, the cost is merely shifted.

More than 100 interest groups — from insurance companies to nurses to counties and nonprofit groups like Catholic Charities — are backing an extension of the tax, in part because they fear these cost shifts will fall on them.

Even the Minnesota Medical Association — the doctors who ostensibly pay the tax — want the money to keep coming in, albeit collected by insurers instead of health care providers.

Sen. Michelle Benson, R-Ham Lake, who chairs the health and human services finance committee, is responsible for putting together a Republican budget without the provider tax.

She noted that when the provider tax was created by the Legislature and signed by Republican Gov. Arne Carlson in the early 1990s, it was intended to fund MinnesotaCare, a public health insurance program for the working poor. When the Affordable Care Act passed in 2010, the federal government began funding much of MinnesotaCare. Former Gov. Mark Dayton agreed to allow the tax to expire at the end of 2019. Since then, the tax has been used to fund other health and human services programs, most importantly a good chunk of Medical Assistance, which is the state version of Medicaid that provides care to the impoverished and their children and people with disabilities.

“What it’s used for now is to backfill general fund spending. It allows other spending to increase without consequence,” Benson said. “People can say it’s targeted to health care but in reality it just allows government to grow.”

For Republicans — and Democrats, too, though they’re less likely to acknowledge it — the heart of the argument is whether government is going to forfeit $700 million per year.

Shrinking government

Given the state’s Democratic lean — a Republican hasn’t won statewide office in Minnesota since 2006 — Republicans have taken a shrewd, piecemeal approach to achieving their larger project of shrinking government.

In 2017, they successfully shifted sales tax money out of the general fund and into road building, effectively cutting off a source of money to the rest of state government. That year they also passed tax cuts whose effects will again force government to contract.

For Tony Lourey, the state’s Human Services commissioner, that larger ideological fight is merely a distraction from his increasingly urgent pleas.

“This is serious and has tremendous implications for families across Minnesota,” he said.

Lourey accuses Senate Republicans of dishonest budgeting. The provider tax goes into an account called the Health Care Access Fund that has built up a surplus. That surplus has been earmarked to help balance the Republican health and human service budgets for the next four years. Without the tax, the GOP budget would keep some services, but without an ongoing way to pay for them.

To get the federal matching dollars to fund Medical Assistance, the state has to offer a basic set of services. Lourey said the state could legally start cutting to make up the eventual shortfall. Among the possible targets would be coverage for dental, hearing and vision care, as well as for occupational and physical therapy.

But Benson said it’s time for Minnesota to have a conversation about the right level of support for people on public programs. She and other GOP leaders say they would like to align public programs with the benefits available to people with private insurance, many of whom don’t have their vision or dental covered.

“We are in the top 10 in benefits for able-bodied adults, the disabled, everybody,” she said. “Maybe it’s time for us to evaluate if we are on pace with things that are necessary for health care in our safety net.”

The Minnesota Center for Fiscal Excellence analyzed spending on government programs across all 50 states, adjusting for price differences. Minnesota spent the second most in the nation on social safety net programs for people at 150% of the poverty level and below, and 36th on health and hospitals.

By making the safety net less attractive relative to private-sector insurance, Minnesota would encourage low-income residents to strive for the middle class, Benson argues.

“We want everyone achieving everything they can, and our public programs should never hold them back,” she said.

Lourey said the results speak for themselves, and that includes a healthy population that lives longer and works more.

“Minnesota is one of the healthiest states in the country, and it’s not by accident,” he said. “It’s by design.”