Budget includes first sales tax cut in state history, maintains a balanced budget for years to come by making cuts and curbing growth in spending, and protects investments made last session

ST. PAUL, MN - Governor Tim Walz and Lieutenant Governor Peggy Flanagan today presented their 2025 biennial budget. The budget includes the first sales tax cut in state history and closes tax loopholes for services offered by wealth managers and lawyers. It also combats fraud and sets Minnesota up for success for years to come by curbing spending growth in the programs that drive the structural deficit.

“This budget is responsible, measured, and honest, and it starts with one goal: fiscal responsibility?,” said Governor Walz. “Our plan sets Minnesota up for success in the future by addressing long-term budget challenges and protecting the investments we made to improve lives, including universal meals, paid family and medical leave, and tax cuts for seniors and middle-class families.”

“We are providing Minnesota with a strong economy and stability for years to come building on investments in children and families from 2023,” ?said Lieutenant Governor Flanagan. “Our dedication to providing services and support for those who need it most remains consistent. This budget is centered on managing spending in areas we know will grow. Minnesota has always been and will remain a generous state, one that is committed to helping our neighbors.”

If passed, the budget would leave $2.1 billion on the bottom line in FY 26-27, and $355 million in FY 28-29. This comes after fully replenishing the state’s rainy day funds and years of passing balanced budgets. Thanks to that sound fiscal management, Minnesota has earned AAA bond ratings for three consecutive years.

Responsible Cuts and Curbing Growth
The Governor and Lieutenant Governor’s budget includes responsible budget cuts and curbs unsustainable growth in spending in the programs that drive the structural deficit. The budget will limit year-over-year growth rates in Medicaid waivers without limiting eligibility for services, saving the state more than 1.3 billion dollars. ?The budget also cuts state funding to private schools and includes a 5% reduction in Special Education transportation reimbursement costs, saving?approximately $50 million in each of the next two-year budget cycles while incentivizing schools to?create efficiencies in transportation.

“The Governor’s budget proposal does exactly what we need,” said Minnesota Management and Budget Commissioner Erin Campbell. “It addresses the structural imbalance between revenues and expenses, brings spending on the fastest growing programs in the budget to more sustainable levels, broadens the sales tax base while providing the first-ever rate reduction in statewide sales taxes, and creates a projected positive balance – not only in the next biennium but also in the following one.”

Lowering Taxes and Closing Loopholes
The Governor and Lieutenant Governor propose cutting the statewide sales tax by .075%, which would be the first sales tax cut in state history. They also propose closing loopholes by expanding the sales tax base to services provided to individuals by investors, bankers, and lawyers?, making the tax system more fair and less regressive. Additionally, the budget proposes an investment in a new corporate franchise tax division unit to audit complex pass-through entities and close loopholes.

The budget also proposes an increase in the surcharge currently levied on health maintenance organizations from 0.6% to 1.25% of total premium revenue, to ensure large health care corporations pay their fair share.

“The Governor’s budget includes smart tax policy that will improve Minnesota’s tax system, particularly by cutting the general sales tax rate and broadening the base to include more services,” said Minnesota Department of Revenue Commissioner Paul Marquart. “This will help right-size our sales tax code to reflect a more service-oriented economy, create more stable revenue, and increase fairness for consumers and businesses.”

Stopping Fraud
The Governor and Lieutenant Governor’s anti-fraud package turns the dial toward tighter controls and greater oversight by strengthening enforcement authority and creating tougher penalties. ?The proposals include adding nine staff members to the Attorney General’s Medicaid Fraud unit; giving agencies expanded authority to stop payments from going to people and entities suspected, charged, or convicted of fraud or financial crimes; and using artificial intelligence to detect and prevent fraud. The package also increases the criminal penalty for stealing public funds by 20%.

Targeted Investments
The Governor and Lieutenant Governor’s budget also makes targeted investments to support Minnesota’s economic growth. The budget expands the Research and Development tax credit, maintaining Minnesota’s status as a hub for research and innovation. The budget expands Minnesota’s nation-leading Sustainable Aviation Fuel tax credit and supports the growth of the industry. It also contains permitting efficiency measures to shorten the time it takes for businesses to obtain the permits needed to safely operate in Minnesota.

Details on the budget can be found here and on the Minnesota Management and Budget website.