Budget Reset
Minnesota’s Path Back to Fiscal Sanity
Preview:
The November 2024 budget forecast came with some predictable gloomy news: After starting the 2023 legislative session with an $18 billion surplus, Minnesota Management and Budget (MMB) projected a potential budget deficit of over $5 billion for the 2028-29 biennium. The deficit has grown to $6 billion with the release of the February 2025 forecast.
Even more concerning, the deficit is part of a broader fiscal issue. In the 2024-25 biennium — the period between July 2023 and June 2025 — Minnesota will spend $71 billion but collect only $62 billion in revenue. This leaves a structural imbalance of over $9 billion, mainly covered by part of the historic $18 billion surplus.
Similarly, the general fund budget is projected to end the 2026-27 biennium with a $450 million surplus — down from the $600 million estimated in the November 2024 forecast — but total revenues collected in that period are over $3 billion less than spending. This structural imbalance continues to grow, resulting in a $6 billion budgetary deficit in the 2028-29 biennium — over $2 billion after excluding discretionary inflation.
The underlying ability of Minnesota’s tax system to support the state government has been deeply compromised. The state budget is on an unsustainable path, and immediate action is needed in the 2025 legislative session to get it under control.
Key findings from the report include:
- For long-term budget sustainability, lawmakers need to cut spending starting in the 2026-27 biennium and effectively bring the annual baseline budget to where it was before the 2024 fiscal year. This will lower the starting figure for all future estimates, lessening pressure on revenues in the long run.
- Minnesota’s general fund spending per person in 2024 reached its highest level since 1990, marking a 26 percent increase from 2023. Per capita spending, including discretionary inflation, is expected to reach $5,671 in 2029. This would be the state’s third highest level since 1990, surpassed only by 2024 and 2025 — and would represent a 17 percent increase over 2023. There is room for lawmakers to cut spending without jeopardizing essential public services.
- During the COVID-19 pandemic, the federal government increased funding to the states between 2020 and 2023, reducing state spending on some joint federal-state programs, such as Medical Assistance (MA). This skewed historical trends, making 2019 a more suitable baseline for lawmakers to revert to. Per capita general fund spending in 2019 — $4,980 in 2024 dollars — is surpassed only by 2020 in the entire period between 1990 and 2023. Therefore, returning to 2019 per capita spending levels should deliver substantial savings without posing significant challenges.
- Utilizing 2019 general fund spending as the baseline for the 2026 fiscal year yields over $5 billion less spending in the 2026-27 biennium compared to February 2025 estimates. Savings would grow and exceed $8 billion in the 2028-29 biennium. Spending under the 2019 baseline would also consistently stay below collected (or current) revenues, which eliminates the structural imbalance in the entire 2026-29 period and provides flexibility to manage unexpected crises, such as recessions and pandemics , and potential federal spending cuts. The same would be true if lawmakers used any year before 2024 as the baseline.
- Lawmakers must prioritize spending cuts in Health and Human Services (HHS) and E-12 education, the two biggest and fastest-growing state expenditures. According to MMB data, HHS spending has more than tripled between 1990 and 2024 and is projected to account for over 90 percent of general fund spending growth between 2023 and 2029. E-12 education has more than doubled between 1990 and 2024 and will contribute 40 percent to general fund spending growth between 2023 and 2029. Meaningful reforms must address both categories, but especially HHS, which presents a significantly larger challenge to the state budget.
- In addition to spending cuts, lawmakers should consider adopting a law limiting spending growth. Colorado, for example, has a Taxpayers’ Bill of Rights (TABOR), which caps the amount of revenue that state and local governments can collect and spend, requiring any excess revenue to be returned to taxpayers. Such a constitutionally binding limit would ensure that spending keeps up with inflation without imposing an escalating burden on taxpayers.
- Minnesotans already pay among the highest taxes in the country, which has put a drag on the state’s economy. Minnesota’s rate of business formation, for instance, is among the lowest in the country. Furthermore, while Minnesota has a higher-than-average per capita Gross Domestic Product (GDP), its yearly growth has consistently lagged behind the national average since 2015. In 2014, Minnesota’s per capita GDP was nearly $4,700 higher than the national average; however, that gap had shrunk to less than $500 by 2023. Tax hikes will worsen these concerning trends while failing to address the root cause of the deficit: excessive government spending.