Capitol Watch: 2025 legislature leaves town with budget out of balance

With the 2025 legislative session finally in the books, we humbly offer the final Capitol Watch of the season. They didn’t finish on time, but the legislature and Gov. Tim Walz managed to meet their constitutional duty of passing a budget to run state government for the next two years just weeks before the beginning of the fiscal year.

The main thing Capitol Watch readers need to know is the legislature and Gov. Walz passed a budget that will spend $66.4 billion over the next two years but only take in $64.4 billion in revenue, a $2 billion difference. And it gets worse in future years. They used leftover cash from the 2023 surplus to paper over the difference, but the fact remains: the Minnesota budget is structurally unbalanced.

Here are our observations on the 2025 session.

The good

The strongest part of the session for conservatives was the beginning, when House Republicans stood together under extreme pressure during the three-week DFL boycott of session. They successfully challenged the eligibility of a DFL candidate who did not live in his district, and then won a court battle over Gov. Walz’s illegal writ of special election. This changed the DFL walkout from weeks into months and ultimately led to them caving in and giving up their fight for power. The deal they struck gave Republican Lisa Demuth the Speaker’s chair for the full two-year term. This allowed her to set the schedule and control the floor of the House.

Republicans also won the creation of a permanent Fraud Prevention and Agency Oversight Committee with a 5-3 GOP majority. The committee was chaired by Rep. Kristin Robbins and she used that platform to shine a spotlight on waste and fraud in Minnesota state government with several high-profile hearings, including one featuring one of your humble authors.

One of the recommendations of the Fraud Prevention Committee was the creation of an Office of Inspector General to investigate fraud in state government. The proposal passed the Senate but was blocked by House Democrats on the final night of the regular session. According to the latest Thinking Minnesota Poll, seventy-two percent of Minnesotans support creating the Office of Inspector General while only twenty-four percent oppose.

By the way, these early victories would not have been possible without the pressure Capitol Watch readers put on House Democrats through our Get Back to Work campaign that delivered 20,000 email messages.

Having Demuth in the Speaker’s chair ultimately led to a budget deal we would characterize as the best a conservative could hope for considering the circumstances. They prevented Walz and legislative Democrats from raising the income tax or the sales tax. They did not panic and agree to a bad budget deal as the regular session ended. And they held out for the elimination of free health care for illegal immigrants, a huge legislative (and budget) victory. Minnesotans stand with Republicans on this issue according the most recent Thinking MinnesotaPoll, with 61 percent opposing the continuation of this funding.

Another strong moment came from Senate Republican Leader Mark Johnson, who refused to sign the final budget deal after being kept out of the negotiations. Johnson had to walk a fine line all session between supporting his friends in the House and reserving the right to criticize a budget deal that spent more money than his caucus wanted. Senate Republicans were patient and united and eventually the other leaders needed their votes, giving them the opportunity to leverage their support for policy changes. It’s the best a minority caucus can expect under the circumstances.

The not-so-good

It was a strategic mistake for House Republicans to unilaterally negotiate budget targets with House Democrats so early in the process. Making early concessions to House Democrats forced them to negotiate again from this new position with Senate Democrats and Gov. Walz. Next year, Speaker Demuth should insist that all parties be involved in the negotiations from the beginning. Gov. Mark Dayton famously once said, “I’m not going to wade into their swamp and choose between their alligator and their crocodile.” Good advice!

There was absolutely no progress made on education reform after Gov. Walz zeroed out funding for non-public schools in his budget proposal. Everyone interested in reform had to drop what they were doing and focus all of their energy and resources defending something that’s been in place for 50 years. It was a cynical move by Walz, but it worked. House Republicans “won” the fight, preserving the status quo. Meanwhile, there was no discussion of school choice or eliminating the ethnic studies mandate or any other education reform. This is not a criticism of education reformers or House Republicans: they had to fight to preserve this funding.

Another disappointment from session was the Republican obsession with mandate relief for school districts. Yes, several bills that passed in 2023 heaped huge unfunded mandates onto school district budgets. Democrats passed these bills without any Republican support. But in 2025, it was Republicans who became the strongest advocates for rolling back the mandates, and it became the entirety of their message on education. It is wishful thinking to believe the education cartel in Minnesota is going to reward Republicans with votes for this advocacy in St. Paul. The Democrats once again tricked legislative Republicans into spending energy and capital fixing something they broke on behalf of people who will never support them.

Notwithstanding the positive spin on the budget from earlier in this email, the fact remains that everything in the 2023 budget is still intact, and the base spending amount was carried forward into 2025. As noted above, this does not include funding for free health care for illegal immigrants.

The biggest disappointment of the 2025 session was how they funded what’s known as reinsurance, a complicated process to backstop the individual health insurance market. According to Session Daily:

“To fund the reinsurance program, $145 million would be transferred from the Health Care Access Fund to combine with $99.81 million in federal funding and existing funds in the Premium Security Account in fiscal years 2026-27. Federal funding of $99.81 million in fiscal year 2028 would be combined with an assessment estimated to total $266.83 million imposed on group health carriers in fiscal year 2029. The carriers would then be able to claim a tax credit for that assessment in fiscal year 2030.”

This is a tax on private health insurance companies that raises revenue to pay private health insurance companies to cover high-risk patients. And private health insurance companies will be able to claim a tax credit in 2030, essentially getting paid twice to do the same thing. It’s a gimmick, it’s a shift, it’s a tax increase. The fact that this was not heard in the tax committee and was created for final passage has the look of a deal that no legislator could describe at any level of specificity.

They also raised the tax on marijuana, giving the Minnesota black market even more of an advantage.

The reality

We don’t want to be that critical considering Republicans controlled one half of one caucus. Speaker Demuth was outnumbered in negotiations 3-1 with a press corps inclined to reproduce Democrat talking points on demand. The biggest victory was simply preventing another Off the Cliff 2023 session. To do more, they will have to win more elections.