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Business tax cuts highlight Pawlenty plan

Gov. Tim Pawlenty delivers his seventh State of the State address Thursday, including a long list of business tax breaks among his proposals. Behind him is House Speaker Margaret Anderson Kelliher. Staff photo by Don Davis

ST. PAUL - Gov. Tim Pawlenty took the lead on Minnesota budget dance Thursday, calling for a variety of business tax cuts while at the same time increasing education spending.

But Democrats may cut in because they don't like some of the Republican's steps.

Legislators said that the wish list Pawlenty presented in his State of the State speech was the beginning of long performance.

"The process is a dance," Rep. Steve Drazkowski of Wabasha, said after his fellow Republican's 39-minute speech.

The budget dance will continue for months.

Pawlenty's speech highlighted proposed business tax breaks, which he said could inspire firms to hire more Minnesotans.

In his seventh annual State of the State address, Pawlenty also said he wants to freeze all state wages and those of local governments that get state money.

And schools that improve student performance would get more state money under his plan.

Pawlenty did not lay out details of his spending plan; that will come before month's end. But the governor made it clear he will rely on state government spending cuts to plug a massive state budget deficit.

Democrats appear to be leaning toward a combination of program cuts and tax increases, but they don't expect to release budget proposals for several weeks.

Lawmakers said Democrats will counter Pawlenty's proposals with higher taxes and upping health programs for the poor spending (which Pawlenty says must be cut) before reaching a compromise by the time a budget must be finished later this year.

Pawlenty, like Democrats, focused on attracting new jobs and saving existing ones.

"Minnesota is not alone in the crisis, but we do face a unique challenge," Pawlenty said.

The unique challenge, he said, is that it "costs too much for employers to create and keep jobs in this state."

What he called the Minnesota Jobs Recover Act would provide a variety of business tax breaks, including cutting the state business tax rate in half.

His proposals also include "green jobs," those that come from the energy industry in the areas of wind, solar, biomass, biogas, geothermal and biofuels.

The speech - interrupted by applause 32 times - came during Minnesota's bleakest economic times since World War II, with new layoffs being reported almost daily.

Pawlenty and lawmakers need to fill a budget deficit of at least $4.85 billion before writing the two-year budget that begins on July 1. Many budget experts predict the deficit will grow to more than $6 billion this spring.

The governor must present legislators with his budget proposal by Jan. 27, but he will adjust that plan in March, after a new economic report updates how much money the state has available. Democrats who control the Legislature likely will wait until after that report to offer their own budget plan.

Even Republicans acknowledge Pawlenty's plan will be fought.

"I assume there are going to be some troubles over the things the governor will propose," said Sen. Joe Gimse, R-Willmar.

Reps. Mary Murphy, DFL-Hermantown, and Dean Urdahl, R-Grove City, said the real speech will be one when Pawlenty outlines details of his two-year budget plan.

"He just gave us hints," Murphy said of the Thursday speech.

Pawlenty's proposals will cost the state too much, Sen. Steve Murphy, DFL-Red Wing, said.

"I'm just wondering where the governor is going to come up with $2 billion more spending," Murphy said.

Besides increasing education spending, cutting taxes costs the state, much like spending on programs.

"There is no way we can offer tax breaks," Murphy said.

Education is important for Minnesotans to get new jobs, Pawlenty said. So he called for several education changes, including more money. Some Democrats say his plan could cost an additional $500 million, and he did not say how he would fund the increase.

Per-pupil state aid would increase 2 percent under Pawlenty's plan, but only for students meeting state education standards "or at least showing reasonable growth towards achievement."

Adding money to education comes with strings: "In exchange, we must expect more."

Among his education ideas are to raise academic standards and graduation requirements, adopt performance pay for teachers through an expanded Q Comp program, upgrading math and science teacher training and giving more college credit classes in high schools.

"Our K-12 system is not ready for the future," Pawlenty said.

While thanking state colleges for their on-line initiatives, he said that they also need a state-imposed limit on how much they can raise tuitions.

"Otherwise, the necessary changes in higher education that we will make this session will fall too heavily on students and their families," he said.

Pawlenty warned that without change, health and human services programs will rise 19 percent.

"We must slow down the rate of spending growth in these programs or it will eliminate our ability to fund other priorities in the future," he said.

Also, he warned that government employees soon will face layoffs. However, he added, those could be minimized by a state government wage freeze. He also wants other governments that get state money, such as cities and counties, to freeze wages.

He said he wants to combine human services programs operated by the state's 87 counties into 15 regional agencies.

Leaders of the Democratic-Farmer-Labor-controlled Legislature were not happy with Pawlenty's speech.

Senate Majority Leader Larry Pogemiller, DFL-Minneapolis, said the Pawlenty administration has not been successful at the teacher pay-for-performance Q Comp system, so he did not understand why the governor wants to expand it.

Increasing school spending while cutting some taxes will make the state budget worse, House Speaker Margaret Anderson Kelliher, DFL-Minneapolis, said. The proposals could drive budget deficit to $6 billion, she said, which she added "seems curious."

"These proposals are making the deficit larger, which just doesn't seem logical," Pogemiller added.

But Republicans backed Pawlenty.

"I found the governor's message very realistic and also very optimistic," said House Minority Leader Marty Seifert, R-Marshall.

Overall, Rep. Doug Magnus, R-Slayton, liked what he heard Thursday. But unlike many other Republicans, he said that he could be willing to consider a tax increase if the budget worsens.

"I'm looking at every option," he said.

Magnus likened the budget process to a marriage.

"It is give and take until you go in front of a judge and say we have irreconcilable differences," Magnus said, adding that the Legislature cannot give up since it has to pass a budget.

Pawlenty probably does not expect to get everything he seeks, Magnus said, especially since the deficit will worsen.

"You have to put a plan out there now looking at the current situation," Magnus said. "That is Plan A. You go with that until you get a better sense of what the numbers are going to be, then you go to Plan B."

"The DFL basically is not elected to make cuts," Magnus added. "They are not interested in wage freezes."

"On the other hand, the Republicans generally don't like to increase taxes and idealistically support taxes on businesses, for instance, to increase jobs."

Eventually, the two sides must compromise, he said.

Cutting business taxes is a good idea, the southwestern Minnesota lawmaker said.

"If you don't put any fertilizer on you aren't going to grow a crop," he said.

If business taxes are not cut by lawmakers, they will fall because businesses fail, Magnus predicted. "It is going to cost money immediately, but I think it will help in the longer term."

Rep. Murphy said that Pawlenty's speech did not answer enough of her questions.

"I'm anxiously waiting to see his solutions," she said.

Rep. Bill Hilty, DFL-Finlayson, said that he is concerned because Pawlenty proposed cutting taxes at a time when the budget already lacks revenue.

Hilty suggested providing tax cuts for new green jobs, while a good idea, could endanger existing jobs.

Sen. Steve Dille, R-Dassel, was one of many lawmakers of both parties to question Pawlenty's proposal for more education funding.

"You are going to have to squeeze more out of the system to support K-12 education," he said.

Dille was more accepting of Pawlenty's business tax breaks than some lawmakers because they would be phased in over the next several years.

Urdahl said Pawlenty's budget speech will be interesting because "a lot of people are waiting to see where it (funding) will come from."

Rep. Kent Eken, DFL-Twin Valley, thought Pawlenty came on too strong when he demanded that legislators not raise taxes.

Pawlenty says he has not raised taxes, but Eken and other rural Democrats blame the governor for rural property tax increases.

"It was an overly partisan statement," Eken said of Pawlenty's tax talk. "I was expecting, maybe, a softer tone."

Eken did not know how the state can afford to cut business taxes.

"I was wondering if he understands we are facing a deficit," Eken said.

As an educator, Eken said that he is glad Pawlenty put such a high priority on education. However, money may not be there to do what Pawlenty wants.

"How is he going to pay for all that stuff?" Eken asked.

Sen. Rod Skoe, DFL-Clearbrook, the speech lacked information.

"There are many aspects of the governor's speech we'll be looking seriously at throughout the legislative session, including all the ways to make the state run more efficient," Skoe said. "However many of his ideas lacked detail and fell short in telling us how he plans to fix the huge problems we face."

Drazkowski called the speech great.

Business tax cuts are part of the answer to saving jobs, he said, and need to be part of the final legislative budge negotiations.

He also liked Pawlenty's plan to force more accountability into Minnesota's schools. "The people are really calling for that. They want to see a system that performs."

Sen. Murphy said that business tax cuts are a non-starter.

"There is no way we can offer tax breaks," he said.

Don Davis
Don Davis has been the Forum Communications Minnesota Capitol Bureau chief since 2001, covering state government and politics for two dozen newspapers in the state. Don also blogs at Capital Chatter on Areavoices.