Updates on the Announced Budget Proposal by Minnesota Governor
Minnesota Governor Tim Walz recently released his supplemental budget proposal, outlining a Updates on the Announced Budget Proposal by Minnesota Governor
Minnesota Governor Tim Walz recently released his supplemental budget proposal, outlining a mix of tax policy changes and fiscal priorities that carry both opportunities and concerns for taxpayers and practitioners. Notably, the proposal continues to include an expansion of the sales tax base to certain professional services—including legal, accounting, and financial services—which has been a longstanding concern for the profession. This proposal comes despite an improved state financial outlook, with recent projections showing a $3.7 billion surplus in the near term and a modest surplus expected into 2028 and 2029. The budget also signals a broader effort to align Minnesota with federal tax provisions to enhance simplicity and administrative consistency, though key items such as research and experimentation expensing were not included.
Beyond tax policy, the Governor’s broader budget outlines approximately $65.9 billion in spending across major areas including education, health and human services, and property tax aids, while maintaining budget reserves and a projected ending balance. The proposal also includes revenue-raising measures such as expanding the sales tax base and increasing certain healthcare-related surcharges. On an additional note, the Governor supports extending the pass-through entity tax (PTET) election, which is expected to provide significant federal tax savings—estimated at approximately $400 million—for Minnesota taxpayers without a cost to the state. We will provide you with more information and any updates on the PTET election once it becomes available.
For more information: Governor’s Budget Recommendations / Minnesota Management and Budget (MMB)
Fed Votes to Hold Rates Steady while Noting Uncertain Impacts
The Federal Reserve recently voted to maintain its benchmark federal funds rate at 3.5%–3.75%, reflecting a cautious approach amid persistent inflation, mixed labor market signals, and heightened geopolitical uncertainty. Policymakers modestly upgraded their economic outlook, projecting stronger near-term growth alongside slightly higher inflation expectations for 2026. While the Fed continues to anticipate limited rate cuts in the coming years, the timing and pace remain uncertain. Inflation pressures—exacerbated in part by rising oil prices tied to geopolitical tensions—remain a key concern, with officials emphasizing that risks to the economic outlook are still evolving.
Fed Chair Jerome Powell noted that the economic impact of ongoing global conflicts is “too soon to determine,” particularly as energy market disruptions have contributed to elevated short-term inflation expectations. The Fed now projects inflation at approximately 2.7% for the year, with a gradual return toward its 2% target over time, alongside steady economic growth and a modest rise in unemployment. Against this backdrop, financial markets have tempered expectations for near-term rate cuts, and the Fed’s policy path remains highly data-dependent as it balances inflation control with economic stability.
Experts Warn of Growing Multistate Payroll Risks from Remote Work
At a recent Capital Summit session, experts highlighted the growing complexity of multistate payroll compliance as remote and hybrid work arrangements become more prevalent. A central issue for employers is establishing tax nexus, as even a single remote employee may trigger state income tax withholding obligations. Importantly, withholding requirements are generally determined by where services are performed rather than an employee’s state of residence. While certain states provide limited relief through reciprocity agreements or de minimis thresholds, most require withholding from the first day of in-state work.
In addition to income tax considerations, employers must navigate related obligations such as state unemployment insurance (SUI) sourcing, paid family and medical leave (PFML) reporting, and state registration requirements. To manage these risks, practitioners recommend implementing systems to accurately track employee work locations and adopting more consistent hybrid work schedules, which can help simplify wage allocation and improve overall compliance.
DOJ Urges 2nd Circuit to Reject SE Tax Ruling
The Department of Justice (DOJ) has urged the U.S. Court of Appeals for the Second Circuit to reject a recent ruling by the U.S. Court of Appeals for the Fifth Circuit regarding the application of the self-employment (SE) tax exception for limited partners, potentially setting up a circuit split. In its brief in the Soroban Capital Partners case, the DOJ criticized the Fifth Circuit’s decision in Sirius Solutions as “fundamentally flawed,” noting that it allows taxpayers to rely solely on state-law limited partner status to qualify for the self-employment (SE) tax exception, regardless of their level of active participation.
Instead, the DOJ is advocating for the Tax Court’s long-standing “functional analysis” approach under IRC Sec. 1402(a)(13), which evaluates a partner’s actual roles and activities in determining eligibility for the exception. According to the DOJ, the Fifth Circuit’s interpretation places undue emphasis on legal form over economic substance, disregards legislative intent, and could create a significant loophole allowing active partners to avoid SE tax on income derived from their services.
