The Minnesota Legislature convened a one-day special session on Monday, June 9^th to complete the work on the state’s budget for Fiscal Years (FY) 2026-2027. This one-day marathon session was needed to pass all budget bills prior to June 30^th, which is the end of the state’s fiscal year. The special session adjourned in the early morning hours on Tuesday, June 10^th after both the House and Senate passed all necessary budget bills.

Fiscal Year 2026-2027 Budget Overview

The budget for FY 2026-2027 will consist of roughly $66 billion in spending, which is a decrease from the massive $72 billion budget that was enacted during the previous budget cycle. Although just two years ago the state had a healthy budget surplus of $18 billion, an updated budget forecast released prior to the session projected a looming budget deficit of $6 billion in the outyears (FY 2028-2029). This projected deficit cast a shadow over the budget making process and resulted in an environment in which tough decisions needed to be made on both spending and revenues.

The final budget agreement for FY 2026-2027 fell short of fully eliminating the projected budget deficit in the outyears. However, it is projected to result in a $1.9 billion budget surplus at the end of FY 2026-2027, and a reduced projected budget deficit of about $2.2 billion in FY 2028-2029. Lawmakers will still have the daunting task of ensuring that the state’s budget is balanced in FY 2028-2029, which will likely need to be addressed in future legislative sessions.

In addition to passing the budget, the Legislature also passed a $700 million Capital Investment bill. The Capital Investment bill is funded by state debt and is used to pay for upgrades to infrastructure throughout the state. The Capital Investment bill is unique in that it requires a super-majority of three-fifths of both legislative chambers to pass.

PFML Payroll Tax Cap Decrease – PASSED

NFIB supported efforts to make common-sense modifications to the Paid Family and Medical Leave (PFML) program that was passed in 2023. Legislation was introduced this session that proposed to reduce the number of weeks available for leave, create a small business exemption, modify the definition of “family member,” reduce the current cap on the payroll tax, and make other operational changes to how the program will function.

Despite these efforts and the grassroots efforts of our members, the only change to the PFML program was a reduction in the payroll tax cap of 0.10%. This change will lower the payroll tax cap to 1.1% (previously 1.2%) of wages paid up to the maximum FICA limit. Although this change will not have an immediate impact on the costs of the PFML program to employers, it will help to contain future costs if it is determined that the payroll tax needed to fund the program is more than 1.1%.

As it currently stands, the PFML program is scheduled to go live on January 1, 2026. NFIB will have additional resources for our members to help navigate the requirements of this program.

Modifications to the ESST Mandate – PASSED

Another effort that NFIB supported this session was a push to enact reforms to the state’s Earned Sick and Safe Time (ESST) mandate. With the help of our grassroots efforts, NFIB supported legislation that would have created a small business exemption, permitted employers to require replacement workers to ESST use that is foreseeable, as well as other changes that would make the mandate more workable for small businesses.

While not all these proposed changes made it into the final bill, certain aspects were passed into law and signed by the Governor. These modifications include:

• In situations where the need for ESST is unforeseeable, an employee may be required to give notice “as reasonably required by the employer.” The previous standard was “as soon as practicable,” which created operational issues for employers in trying to plan for appropriate staffing levels. This provision is effective August 1, 2025.
• An employer can require reasonable documentation from an employee that shows the ESST is covered by a permissible use after the employee misses two consecutively scheduled workdays. The previous standard required that an employer wait 3 days to request such documentation, which heightened concerns over potential abuse. This provision is effective August 1, 2025.
• Current law prohibits employers from requiring that employees seek replacement workers and there was some ambiguity as to whether that prohibition applied to employees who voluntarily seek or trade shifts with a replacement worker. The bill provides clarification that employees are not prohibited from voluntarily seeking or trading shifts with a replacement worker to cover the hours that the employee uses for ESST. This provision is effective August 1, 2025.
  
• Under current law, employers can choose to frontload an employee’s entire ESST allocation for the year at the start of employment. Employers will soon be permitted to advance ESST to an employee based on the number of hours the employee is anticipated to work for the remaining portion of the year (pro-rate). However, if the number of hours advanced is less than the amount the employee would have accrued based on the actual hours worked, the employer must provide additional ESST to make up the difference. This provision is effective January 1, 2026.

Modifications to Break Time Requirements – PASSED

The laws governing mandatory break times were modified to specify that employers must allow employees to take a rest break within each four consecutive hours of work for at least 15 minutes or to utilize the nearest convenient restroom. It also specifies that employers must allow each employee who is working for six or more consecutive hours to take an unpaid meal break of at least 30 minutes. In both instances, employers maintain the ability to determine when such breaks are to be taken pursuant to employer policies or employment handbooks. These changes are effective January 1, 2026. 

When initially proposed, these provisions included a penalty to be imposed by the Department of Labor and Industry of up to $1,000 per violation. These penalties were removed from the final bill based on concerns that they were overly punitive and failed to consider good-faith mistakes or misunderstandings. However, this provision did include remedies for employees in the form of an employee’s regular amount of pay for the time that should have been allowed plus an equal amount as liquidated damages.

$20 Minimum Wage – NOT PASSED

A proposal to increase the state’s minimum wage to $20 per hour by August 1, 2029, was brought forth again this year. Under this proposal, the minimum wage would have immediately increased to $15 per hour as of August 1, 2025. The minimum wage would have subsequently increased by $1.25 each year until it reached $20 per hour by August 1, 2029. Thankfully, this proposal failed to gain significant support this year and was not included in the final budget deal.

Unemployment Insurance for Striking Workers – NOT PASSED

An effort to provide Unemployment Insurance (UI) benefits to workers who voluntarily decide to go on strike once again received attention this year. Under the proposal, striking workers would have been made eligible for unemployment insurance benefits almost immediately. This measure is fundamentally unfair to small businesses and would jeopardize the financial stability of Minnesota’s unemployment insurance system. Multiple states have rejected similar proposals in recent years, and we are pleased that Minnesota chose to do so as well.

Modification of PFAS Prohibition – PASSED

In 2023, a law was passed that banned the sale of certain products that contain intentionally added per-and-polyfluoroalkyl substances (PFAS). As of January 1, 2025, the sale, offer for sale, or distribution of such products was prohibited. Because of this bill, certain products were prohibited without providing sufficient time for manufacturers to explore how to implement PFAS alternatives.

This session, lawmakers made modifications to the prohibition on PFAS by exempting products that contain intentionally added PFAS only in electronic components or internal components until January 1, 2032. An internal component is one that is “designed and intended to not be touched by a person during intended use of handling,” and includes “parts of product used for holding batteries regardless of whether the parts or touched when replacing batteries.” It also exempts youth off-highway vehicles, youth all-terrain vehicles, youth off-highway motorcycles, youth snowmobiles, youth electric-assisted bicycles, and replacement parts for such vehicles until January 1, 2032.

Lead Keys Fix – PASSED

A law passed in 2023 prohibited the importation, manufacture, sale, and distribution of products that contain lead at more than 90 parts per million by total weight. The impact of this law resulted in the immediate prohibition of certain products that contain lead above this threshold, including keys and other products that contain lead only in solder used in internal components.

This session, lawmakers passed a bill that will push back compliance for keys and products with lead only in solder used in internal components until July 1, 2028. It also provides an ongoing exemption for certain keys that contain lead equal to or less than 1.5 percent by total weight.

Sales & Use Tax June Accelerated Payment – PASSED

Included in the 2025 Tax Bill was a provision that requires vendors with sales and use tax liabilities of $250,000 or more in the fiscal year to remit 5.6% of their June liabilities two days before June 30^th, beginning in calendar year 2027. The remaining amount of sales and use tax liability must be paid on or before August 20^th of the calendar year. A penalty will be imposed on vendors who fail to pay their required estimate June sales tax liability. This penalty will be 10% of the difference between the actual required June liability and the amount that was actually remitted in June.

Update to Pharmacy Refund Timing – PASSED

Under current law, a pharmacy may apply for a refund of the wholesale drug distributor taxes paid to a wholesale drug distributor for legend drugs that are brought into the state but are later delivered outside of the state. Currently, a pharmacy may only apply for this refund on its annual returns. A provision in the 2025 Tax Bill modified the timing of this refund to allow a pharmacy to apply for and receive the refund on a quarterly basis, thereby assisting with cashflow needs.

Sales Tax Expansion – NOT PASSED

One of the recommendations in Governor Walz’s proposed budget was an expansion of the sales tax to include legal, accounting, brokerage, trust, and some other banking services. This expansion would have resulted in approximately $200 million in additional tax revenue every two years. It would have also incentivized Minnesotans to utilize out-of-state providers for these taxed services, to the detriment of local businesses. We are pleased that the 2025 Tax Bill did not contain this expansion.

Corporate Franchise Tax Increase – NOT PASSED

Earlier this session, an amendment was offered and adopted in committee that sought to increase the corporate franchise tax rate to 12.45%. The adoption of this rate would have placed Minnesota as the highest corporate tax rate in the country. According to U.S. Census data, 65% of corporations have fewer than 20 employees and almost 80% have fewer than 100 employees. The increase in this rate would have further impaired the ability of small businesses to invest and grow their businesses in Minnesota, and we are pleased that the 2025 Tax Bill did not include this increase.

5^th Tier Individual Income Tax – NOT PASSED

Legislation was introduced and heard this year that would have created a 5^th tier individual income tax rate of 12.45%, which would have applied to individual income over $250,000 and joint income over $500,000. The creation of this 5^th tier would have cemented Minnesota’s position among the states with the highest income tax rates in the nation, and it would have harmed small businesses that operate as pass-through entities. While some in the Legislature advocated for increased income tax to address the looming budget deficit, we are pleased that the 2025 Tax Bill refrained from doing so.

Vendor Tax Collector Reimbursement – NOT PASSED

NFIB supported legislation that would have established a vendor allowance for retailers who collect state sales tax. The responsibility to collect and remit sales tax to the state requires small businesses to incur additional costs associated with administration and compliance efforts. This legislation would have recognized the costs that small business owners incur due to these obligations and would have reimbursed them for collecting and remitting these taxes. Unfortunately, this provision did not make it into the final tax bill.

Modifications to Retail Delivery Fee – PASSED

The final budget agreement made some modest changes to the retail delivery fee that was enacted in 2023. The changes will exempt (1) liquefied natural gas and liquified petroleum purchased by and delivered to a political subdivision or a trade or business and (2) road construction materials purchased by and delivered to a political subdivision or a trade or business from the retail delivery fee for delivery of such products. “Road construction materials” include, but are not limited to, hot mix asphalt, plastic concrete, cementitious materials, concrete admixtures, asphalt cement, and recycled road materials.

Reinsurance Funding – PASSED

As part of the final budget deal, lawmakers agreed to fund the Minnesota Premium Security Plan (“Reinsurance”) for plan years 2026 and 2027. Since its inception in 2017, the Reinsurance program has been effective in stabilizing the individual health insurance market and reducing annual increases in premiums. This is important because small business owners and their employees often rely on the individual market for health insurance. Absent action to provide funding, individual health insurance market premiums were anticipated to increase by an additional 20%.

The final budget deal utilizes existing funds in the reinsurance account, federal pass-through funding, and money transferred from the State’s Health Care Access Fund to provide about $335.6 million for reinsurance in Plan Year 2026. For Plan Year 2027, funding for reinsurance will be provided by federal pass-through dollars and a one-time assessment that will be imposed on group health carriers in FY 2029, for a total of about $376 million in funding. In FY 2030, the group health carriers will be allowed to claim a refundable tax credit that will cover the assessments paid (about $226.8 million in total).

Provider Tax Increase – NOT PASSED

A proposal in the Senate Health and Human Services bill sought to increase the provider tax from 1.8% to 2%. The provider tax is a tax that is levied on gross receipts that health care providers receive for providing patient services in Minnesota. Healthcare providers include, but are not limited to, one who provides the following goods or services directly to a patient or consumer: medical, surgical, optical, visual, dental, hearing, nursing services, drugs, laboratory, diagnostic, or therapeutic services. This increase would have translated to additional costs that would be passed down to the consumer, further increasing the cost of healthcare for small businesses and their employees.

Health Insurance Mandate Defrayal – NOT PASSED

NFIB supported legislation that would have required the State to defray the costs associated with newly mandated health benefits if the Department of Commerce determined that such mandates would increase the cost of health insurance premiums. The Minnesota Legislature has enacted over a dozen new healthcare coverage mandates in recent years, which has resulted in higher premium costs. This proposal would have alleviated the financial impacts of newly mandated health benefits by preventing the costs of such benefits from being passed onto consumers.

Repeal of Public Option Waiver Authority – PASSED

The final Health and Human Services Omnibus bill included a provision that repealed the Department of Commerce’s authority to (1) apply to the federal government for a waiver to establish a public option in Minnesota and (2) implement the public option upon receipt of the waiver.