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LBO: heating‑fuel, water and sewer sales‑tax exemptions reduce regressivity but dollar benefits skew to higher earners
Summary
The Legislative Budget Office told the commission that the three sales‑and‑use tax exemptions reduce the regressivity of the tax system but deliver larger dollar savings to higher‑income households; combined estimated foregone revenue is roughly $344 million in FY2026 and LBO suggested consumption caps as a targeting option.
Legislative Budget Office staff presented Dec. 10, 2025, a bundled evaluation of three sales‑and‑use tax exemptions — residential heating fuels, residential water services and sewer services — and reported that while the exemptions reduce overall regressivity of the sales tax, dollar benefits accrue more to higher‑income households.
Jordan Peoples and Carlos Guedka (LBO) said the exemptions share an objective approved by the commission: to lessen the effective tax burden on lower‑income households and reduce the regressivity of the sales and use tax. LBO reported combined estimated foregone revenue of roughly $344 million in FY2026, with heating fuels accounting for about 58% of the total, sewer services about 34% and water services about 8%.
Using the Department of Revenue's 2024 tax‑incidence (Suits) study, LBO staff noted the Suits index for state and local sales taxes is about −0.221 (regressive). Repealing all three exemptions would make the index slightly more regressive (approximately −0.232). LBO also presented distributional figures: average annual household savings across deciles were about $109 in 2024, with higher‑income deciles receiving larger dollar savings (for example, households above roughly $95,000 saw average savings near $165) while the lowest deciles saw smaller dollar savings but slightly larger proportional reductions in tax burden.
The LBO recommended one possible modification to better target benefits to low‑income households: limit exemptions to a metered consumption threshold (LBO cited Maine's approach of exempting electricity up to 750 kWh per month as an example), noting Minnesota's average monthly residential electricity consumption was about 712 kWh in 2024. The office said such a cap could focus relief on households that consume typical amounts rather than open‑ended benefits to high‑consumption, higher‑income households.
LBO staff also provided revenue‑neutral tax‑rate calculations showing repeal of individual exemptions could be offset by modest reductions in the general sales tax rate (examples: residential fuels repeal could correspond to a ~0.145 percentage‑point reduction; water ~0.025 points; sewer ~0.085 points). They flagged cumulative impacts from federal/state assistance programs (energy assistance, weatherization, Low‑Income Household Water Assistance Program and the Minnesota Family Investment Program) and noted data‑timing limits across programs.
Commissioners asked for median consumption data and geographic breakdowns to better assess targeting; LBO said the median could be provided on request. LBO will distribute evaluation forms and the commission will discuss aggregated results and consider votes in January.
