Minnesota’s budget faces numerous long-term risks, spending reform can’t wait

As discussions on what to do about the state budget deficit continue at the legislature, American Experiment urges no tax hikes.

As our research has noted, not only does Minnesota face a potential $6 billion budget deficit in the 2028-29 biennium, but spending is expected to exceed collected revenues every year between 2024 and 2029. Minnesota’s budget woes are structural and, therefore, require substantial spending reform, particularly in fast-growing social welfare programs.

Even more concerning, these budget challenges are unlikely to end in 2029. Minnesota faces several long-term risks that could further strain state finances in the years ahead, making reform even more urgent. These include an aging population, mounting federal debt, and rising healthcare costs, among others.

The following is a closer look at those long-term budget risks.

Aging population

Minnesota’s population like that of most of the developed world, is aging. As birth rates continue to decline, the elderly will continue to make up an increasing share of the population.

An aging population:

will likely require increased spending on programs targeting the elderly, such as long-term care Services.

At the same time, however, this will mean:

a stagnant or declining workforce, resulting in a smaller tax base to support increased government spending.

Estimates from the Minnesota State Demographics Center show that:

by 2050, residents aged 65 and older will outnumber children under 14. Additionally, the ratio of workers to retirees will reach 3.4, down from 4 in 2020.

This escalating strain on state resources, if not contained, could translate into ongoing deficits.

Potential federal spending cuts

Federal funds are a substantial and growing share of Minnesota’s spending. While federal funds accounted for 24 percent of revenues and 27 percent of spending in the 2014-15 biennium, those figures grew to 35 percent and 33 percent, respectively, in the 2024-25 biennium.

Table: Federal Share of Minnesota Revenues and Spending

Potential federal spending cuts will, thereby, create a hole in the state budget, which without spending cuts, will require increased state revenues.

A slowing economy

Since 2014, Minnesota’s economy has lagged behind most of the nation. While in 2014, Minnesota’ per capita GDP was $4,700 above the national average, that gap shrank to less than $500 in 2023. As of last year, Minnesota’s GDP advantage has disappeared, owing to the state’s sluggish economic performance.

This trend could worsen, especially if Minnesota continues to lose people and businesses to low-tax states. Policy uncertainty at the federal level adds another risk to the state economy and could depress revenues further.

Rising healthcare prices

Healthcare prices usually tend to rise faster than general price inflation. Between 2000 and 2022, for instance, prices for medical care more than doubled, growing by 110 percent. On the other hand, general price levels grew by 70 percent.

With a large and increasing share of the state budget dedicated to expensive public healthcare programs, spending is all but guaranteed to grow as healthcare prices rise.

Spending reform can’t wait

Minnesota’s budget woes are structural and likely to persist due to shifting demographics and other risks. Containing the state’s growing budget, therefore, will require meaningful spending reform, particularly in fast-expanding programs like Medical Assistance (MA).

Raising taxes will increase costs for Minnesotans without addressing the root drivers of spending growth and could further weaken the state’s economic outlook.