The $2.3 billion deficit is likely just the beginning of Minnesota’s budget troubles

After blowing Minnesota’s staggering $18 billion expanding welfare, and paying for free college as well as “affordable housing,” among other things, our lawmakers have dug Minnesota into a budget hole the size of $2.3 billion. According to Minnesota Management and Budget (MMB), spending in the 2026-27 biennium, spending will outpace revenues by over $2 billion.

Unfortunately, however, if nothing is done to curb spending, the estimated budget deficit will likely be just the beginning of bigger budget troubles to come. This is due to several reasons.

Some new spending won’t be reflected in the budget until later

Minnesota passed a humungous budget in the last session. To make that possible, they drew from other funds well outside of general funds, such as special revenue funds and money from the federal government.

For Health and Human Services spending, for example, lawmakers loosened eligibility and working requirements for cash assistance programs. The cost of these changes — which is about $50 million — is currently being funded by federal TANF dollars until the 2027 fiscal year.

Once the state starts paying for these with state dollars in 2028, spending will go up. And if current events are any indication, the cost of these new changes will likely have blown past $50 million by then.

Additionally, lawmakers also allocated over $2 billion in extra funding to Medicaid. Until 2027, over half of the money will come from the Health Care Access Fund (HCAF) — a special revenue fund that has historically been used for MinnesotaCare. If at any point in the future, HCAF cannot sustain this new Medicaid spending, it will have to be shifted to the general fund.

Another issue that the Minnesota Center for Fiscal Excellence (MCFE) recently noted is likely to cause trouble is the cost of employment. By all estimates, the Minnesota government needs to hire at least 4,000 new employees in the next couple of years. This could potentially come with increased costs well outside of what the state has already set aside.

The tax system has been compromised

In addition to potential increasing costs, the state tax system has also been compromised which will likely cause some issues in collecting enough revenue.

For one, Minnesota heavily relies on income taxation. But our income tax system is highly progressive. So, the state disproportionately relies on a small portion of the state’s high-earning individuals, which is in itself a problem.

Unfortunately, this problem was made worse last session, when lawmakers passed targeted “tax cuts” that have eliminated or reduced income tax liability for select taxpayers, such as social security income recipients and low-income parents with children. This has narrowed the individual income tax base even further.

And let’s not forget that high-income earners have already been fleeing Minnesota and going to low-tax states like Florida.

The recent changes to the tax system do not just narrow the income tax base, however. According to MCFE, these targeted tax cuts and tax redesigns have substituted less volatile sources of income tax revenue — such as salaries and social security — with the most volatile sources — such as corporate income — putting the state further in a precarious position.

Other issues to consider

There are various demographic and economic shifts (which state lawmakers have no control over) that will pressure on the state budget. One good example is our aging population.

The United States, and the developed world in general, is facing an aging population. Among other things, this will require massive investments in expensive programs such as public healthcare. At the same time, an aging population means there are fewer people in the workforce to pay for these expensive programs.

The Minnesota State Demographic Center estimated, for example, that by 2050, the population of retirees (those 65 and older), will outnumber that of children aged 0 to 14. And while in 2020, the state had 4 workers for every retiree, that number will drop down to 3.4 by 2050.

You should be concerned

The 2023 legislative session was, indeed, transformative, and its effects will be felt for years to come. Unfortunately, for the state budget, those effects will likely only be negative. The $2.3 billion deficit is just the beginning of bigger troubles to come.