Minnesota’s two gubernatorial candidates have expressed interest in cutting taxes. This is a good thing.
Lisa Demuth wants to cut income taxes by reducing the two lowest tax brackets. She has also mentioned lowering car tab fees. Amy Klobuchar’s plan is less specific, but as some news outlets note, it includes lower or no taxes on Social Security income — most of which has already been tax-exempt since 2023. If limited to Social Security, relief for most Minnesotans will be minor, if any.
Nevertheless, whether any of these cuts pan out will, to some extent, depend on the 2027 legislature. The broader DFL coalition, for instance, has a massive spending agenda that will require tax hikes, not cuts.
A more unavoidable roadblock to tax cuts, however, is the current state of the budget.
Since 2024, the Minnesota state government has spent more money than it has collected in taxes. This should be alarming on its own, considering what it means. The state is living beyond its means, and only systematic reform will remedy the situation.
Yet since carryover funds from previous years have covered this structural imbalance, it has gotten less attention than it should. Since 2024, the legislature has treated the structural deficit as a one-time issue that can be fixed with trims at the edges.
But carryover funds are running out. In its July publication, Minnesota Management and Budget (MMB) estimates a potential $1 billion budget deficit in the next biennium (2028-29).
Favorable tax collections could reduce this budget deficit once the November forecast is released. But the structural deficit will remain, and possibly grow depending on long-term spending trends on costly programs like Medicaid.
Any lawmaker attempting to cut taxes must first find enough room to fix the yearly multi-billion structural deficit. Without discretionary inflation, this would mean cutting the annual budget by about $1 billion — or over $2 billion for the entire 2028-29 biennium. With inflation, spending would have to fall by $1.6 billion a year, or over $3 billion for the entire biennium.
General Fund Spending vs. Current Revenue in Billion $, FY2020-2029 (Includes Discretionary Inflation)
Tax cuts will require additional, sustainable cuts, particularly in fast-growing spending areas like Health and Human Services (HHS). E-12 education, while growing more slowly than HHS, has contributed nearly a third of all spending growth since 2024. It requires reform, as well.
The good news, if we can call it that, is that owing to recent growth, the state budget has a lot of room for reform. I have previously written,
At $71 billion, Minnesota’s 2026-27 budget (including discretionary inflation) is more than $19 billion higher than what the state spent in the 2022-23 biennium. The current budget is also nearly $12 billion (23 percent) more than the state would be spending if it stuck to the pre-2023 session budget.
Clearly, opportunities for meaningful spending reform (and consequently, tax cuts) exist. What St. Paul needs is the fiscal fortitude to make them. And in the 2027 session, American Experiment will be hard at work, leading the charge for reform.