Minnesota Senate passes plan that raises taxes to help fix budget deficit; Republicans reject plan

UPDATED 4:29 p.m.

ST. PAUL - Legislative Democrats want to raise Minnesota taxes $400 million, mostly on couples who make more than $200,000 annually, to help fix the state budget deficit.

Senators passed the bill 34-33 this afternoon and the House was to take it up tonight.

Republican legislative leaders flatly rejected the plan, and GOP Gov. Tim Pawlenty said he would veto it.

"The DFL's proposed tax increase is like Jason in 'Friday the 13th' - it's scary and it keeps coming back," Pawlenty said. "I know the DFL doesn't look to me for advice, but here's a tip: People want government spending cut, not taxes increased."

House and Senate leaders to have the bill on Pawlenty's desk by midnight.

The final week of the 2010 legislative session began this morning with DFL leaders unveiling their plan to balance a nearly $3 billion budget deficit, much of it left by last week's Minnesota Supreme Court ruling that threw out Gov. Tim Pawlenty's 2009 budget cuts.

Much of the plan looked like the cuts Pawlenty made last summer. The big difference was in a tax increase that Pawlenty long has opposed.

A new tax bracket would be added for couples making more than $200,000 a year (after deductions and exemptions). Senate Tax Chairman Tom Bakk, DFL-Cook, said those taxpayers now pay 7.85 percent of their income in taxes and the bill headed to House and Senate votes today would raise that to 9.1 percent.

If the state has a surplus early in 2013, the higher tax would disappear, Bakk added.

Bakk said other, small tax changes also are planned as part of the $400 million-plus tax increase.

Revenue Commissioner Ward Einess said an income tax increase would most hit businesses, so job creation would be hurt if it passed.

"They probably picked the one that is the most offensive to the administration," Einess said.

The commissioner and GOP legislative leaders said Republicans will not override a Pawlenty tax veto. "They are rock solid," Einess said.

The tax increase would bring in revenue amounting to less than 1 percent of the state budget funded by taxes, Einess said, such a little amount that the Legislature should be able to come up with a plan for slightly deeper cuts.

While Bakk and other Democratic tax leaders said they have no plans in case the one they released today fails, Sen. Rod Skoe, DFL-Clearbrook, said they can work on a new proposal while Pawlenty looks at the bill.

"We would hope he negotiates and compromises," Skoe said.

The cuts-only plan Pawlenty wants would hurt rural Minnesota, Skoe said, because rural areas get more money than they receive from the state.

The DFL bill accepts Pawlenty's plan to delay $1.7 billion in school payments, to be partially repaid by federal funds if Congress approves the expected $408 million for Minnesota.

The DFL plan cuts aid to local governments by more than $200 million, more than Democrats earlier said they could accept.

House Majority Leader Tony Sertich, DFL-Chisholm, said the plan takes at least 80 percent of Pawlenty's budget-balancing plan.

The big funding source for the bill is $1.7 billion in delaying school payments, a mechanism Pawlenty and the House wanted, but the Senate did not. The bill provides for $200 million to repay part of the shift, but Senate Majority Leader Larry Pogemiller, DFL-Minneapolis, said he still opposes the delay because there is no method to repay school districts for most of the money the state borrowed from them.

Among other cuts in the bill:

-- $100 million from higher education.

-- $299 million from local government aids.

-- $147 million from health programs, mostly for the poor, on top of another $114 million being cut in another bill.

Sunday is the final day legislators can pass bills, although they may conduct ceremonial business a week from today. That means the deficit must be filled by then unless lawmakers go into a special session that only can be called by the governor.

On Friday, Pawlenty suggested that he might need to call a special session to deal with the budget, but did not go into specifics.

Legislative leaders say the deficit fix needs to contain a mixture of budget cuts, delayed state payments and new revenues, such as tax increases. Pawlenty's plan includes cuts and delays, mostly in later school payments, but he firmly opposes any higher state taxes.

On Friday, the House rejected Pawlenty's budget plan; senators rejected it earlier this year.

The state's two-year budget is about $30 billion. Pawlenty last year used the Minnesota "unallotment" law to delay school payments and cut spending, but the high court last week said that action was not legal.

Since last summer's cuts, the deficit has grown by about $500 million.

Davis reports for Forum Communications Co.