The problem
Yesterday, I testified that:
In February 2023, Minnesota Management & Budget forecast a state government budget surplus of $17 billion for the 2024-2025 biennium. In that “historic” session, the DFL trifecta spent every penny of that surplus and between 2019 and 2024, Minnesota’s state government spending per person and adjusted for inflation increased by 23%.
That “historic” trifecta also hiked taxes and fees by $10 billion, but even this was not enough to cover the explosion in state government spending, and, in November 2024, Minnesota Management & Budget forecast a state government budget deficit of $3.5 billion in the 2028-2029 biennium, or $5.1 billion if you account for inflation.
This deficit — the result of gross fiscal mismanagement by the state government over the last four years — is the central fact of state government finance…
How we close that deficit, whether by tax hikes, spending cuts, or some combination of the two, will be the dominant question in state politics and policy for the next couple of years.
The wrong path
Many of the proposals to have emerged so far propose tax hikes.
Gov. Walz is proposing to increase taxes on health insurance companies to fund “reinsurance.” But while this tax might be levied on insurance companies, the incidence – who bears the burden – will fall on Minnesotans with health insurance in the form of higher premiums. This is a classic “bait and switch.”
The retail delivery fee should be repealed as it is a poor way to finance the upkeep of the state’s roads. A senate bill, SF 2033 authored by Sen. Scott Dibble (DFL), would actually hike it by removing the $100 threshold below which deliveries are exempt from this fee. This takes a bad policy and makes it worse.
Even where tax cuts are proposed, a closer look reveals that they are, in fact, tax hikes. Gov. Walz’ proposal to broaden the base of the sales tax while cutting the rate is not a bad one, in theory. But, as I wrote in January:
…in practical terms, what matters is the extent to which the reduction in the tax take from the lower rate is offset by the increase from the broadened base. Under Gov. Walz’ budget, the average family will save about $42 a year in reduced sales taxes but that saving would be dwarfed by spending $620 on the newly taxed professional services. Overall, the expected impact is about $185 million in additional revenue for the state government.
The measure is, in fact, a tax hike, and on those grounds we do not support it. If the rate were lowered so that the measure was at least revenue neutral, we would.
Even where there are spending cuts, they simply shift the burden of the spending and taxing to another level of government. As I noted a couple of weeks ago, while Gov. Walz proposes to cut health and human services spending by about $1.3 billion over four years, many of these costs are simply shunted to counties and will necessitate higher property taxes.
The solution
We have been clear that there should be no more tax hikes. Indeed, if Minnesota closed its looming budget deficit entirely with spending cuts, real terms, per capita spending would still be higher in 2029 than in any year before 2024.
Minnesotans agree. Last month, KSTP reported:
At some point after the Minnesota House settles its political stalemate, legislators will start focusing on issues. When they do, lawmakers will find that Minnesotans want them to focus on lowering taxes, addressing health care and stopping fraud in state government spending, according to the latest KSTP/SurveyUSA poll.
“You are getting a public reaction against tax increases,” said Carleton College political analyst Steven Schier after reviewing the survey results. “Now Republicans hope they can use that and ride that through the legislative session and into the next election as a winning issue for them.”
When asked to name what they consider to be the most important issue facing Minnesota lawmakers, 25% said “lowering taxes,” making it the single most mentioned top issue in the survey…
Our own polling supports this. Yesterday, my colleague Bill Walsh wrote:
Sixty percent of Minnesotans said spending cuts are the way to close the budget gap.
Throwing out for the moment the polarized camps of Democrats and Republicans, policymakers might ask, “What do regular people think?” The answer: 73% of Independents support cutting spending. Only 8% support raising taxes. The only participants in our poll who want to raise taxes are Democrats. Of the 114 respondents who chose this option (23%), 105 of them identified as Democrats. When it comes to spending and taxes, Democrats like Tim Walz are out of step with most Minnesotans…
The DFL is in a tight spot, which explains their behavior in committee sessions this year. Having settled the political stalemate, they are not yet ready to start focusing on issues. Hopefully the updated budget forecast, due later this week, will focus their minds.