Only bold spending cuts will save the state budget
As discussions on what to do about the budget deficit continue, more proposals for (new) tax hikes are appearing. This should be concerning.
Not only will tax hikes raise costs for Minnesotans, but they won’t address Minnesota’s budget problem, which as I have written before, extends beyond the $6 billion deficit.
According to Minnesota Management and Budget (MMB), the state budget started flashing red at the end of the 2023 legislative session, when spending rose to exceed revenues. That structural imbalance has only grown since then.
In the 2024 November forecast, estimated spending for the 2028-29 biennium exceeded revenues by $5.8 billion. In the February 2025 forecast, that gap grew to $6.5 billion. An estimated $450 million surplus from the 2026-27 biennium slightly reduced that gap, resulting in a $6 billion (budgetary) deficit.
Similarly for the two year budgeting period currently under discussion, the 2026-27 biennium, spending exceeds revenues by over $3 billion despite the biennium ending with a surplus.
Spending and tax proposals that have been put forward do not address that imbalance. Walz’s budget proposal, for instance, would raise taxes by broadening the sales tax base and hiking the HMO surchage — a tax on some insurance companies. In the legislature, a new tax on social media companies has also been introduced.
But even after accounting for proposed tax hikes, spending exceeds revenue by over a billion dollars in the 2026-27 biennium under Walz’s budget. In the 2028-29 biennium, that gap grows to $2 billion.
2023 is the source of current budget woes
The Minnesota state budget saw its biggest expansion in the 2023 session. Minnesota went from spending $28 billion in the 2023 fiscal year to $35.3 billion in 2024. While some of that spending was temporary, every year between 2025 and 2029, general fund spending will be higher than it was at any point in state history.
The same is true when spending is adjusted for population changes.
To balance the budget, lawmakers need to reset the budget, that is get spending back to where it was before the 2024 fiscal year. As American Experiment’s most recent report details, this would align spending with revenues and provide room for lawmakers to handle unexpected crises, such as recessions and pandemics, not to mention potential federal spending cuts.
The budget needs a reset
During the pandemic, the federal government increased funding to states, skewing general fund spending. 2019, therefore, is the most suitable year for lawmakers to return to. In the period between 1990 and 2023, per capita spending in 2019 was surpassed only by 2020.
Therefore,returning to 2019 per capita spending levels should deliver substantial savings without posing significant challenges.
By our estimates, if lawmakers were to return to the 2019 baseline, spending would be reduced by over $5 billion in the 2026-27 biennium, after adjusting for inflation and populating growth. These savings would grow to over $8 billion in the 2028-29 biennium.
Returning to a 2019 baseline not only eliminates the structural imbalance in the 2026-29 period, but also creates room for the budget to deal with any unexpected downturns, economic or otherwise. Spending would stay consistently below revenues for the entire period, ensuring long-term budget sustainability.
Tinkering at the edges only kicks the can down the road
Anything short of getting the state budget back to its pre-2024 levels would not balance the budget. Furthermore, maintaining an elevated budget going forward would require continuing tax hikes on top of the numerous currently proposed tax hikes, especially given historical and anticipated welfare spending growth.