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Majority Leader Tony Sertich of Chisholm talks on the telephone while overseeing the Minnesota House during a rare Saturday session. Representatives dealt with a transportation bill and debated a tax bill. Don Davis/Minn. State Capitol Bureau

House joins Senate in passing tax increase

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ST. PAUL - What to do about taxes is the most controversial of many controversial money issues in the Minnesota Legislature and now the House and Senate have passed different plans.

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The House barely passed its measure Saturday night, a day after senators adopted their version on another close vote. Negotiations begin soon on a compromise bill, but the governor says he doesn't like many of the provisions in either plan.

Among the hottest issues is how tax proposals affect businesses. And the controversy of controversies - whether to raise taxes - overshadows everything, in part because of disputes about how businesses would react.

For example, after Sen. Tom Bakk, DFL-Cook, explained Senate Democrats' tax bill, the Senate's top Republican explained his opposition.

"They are good carrots," Senate Minority Leader Dave Senjem, R-Rochester, said of business tax breaks in the Bakk bill. "They just don't do enough. They are overwhelmed by these tax increases."

The House Saturday night passed a bill 68-65 that would raise a variety of taxes $1.5 billion. Senators Friday voted 35-31 to raise income taxes $2.2 billion.

The House vote was the bare minimum needed to pass the bill, with Rep. Tom Rukavina, DFL-Virginia, changing his vote from "no" to "yes" at the last minute. He has complained about the number of taxes the bill raises.

In both the House and Senate, some Democrats joined Republicans in voting against the tax bills.

Included in the House debate was a 68-65 rejection of an amendment to fully restore the Job Opportunity Building Zones program aimed at attracting business to rural areas. The decision means the House bill would require corporate and individual income taxes to be collected from businesses that had expected several more years of not paying them.

"We have a $6.4 billion deficit, the highest this state has ever seen," Rep. Paul Marquart, DFL-Dilworth, said about the state budget deficit before $1.8 billion in federal economic stimulus funds are included. "We need to make some choices here. The choices here were not the easy ones. The choices here are the right ones."

Marquart, chairman of the House property tax committee, said he prefers cutting back on JOBZ rather than reducing spending to schools, local governments and other needs.

But JOBZ supporters said the state has promised providing new businesses in many rural Minnesota zones a nearly tax-free environment and should live up to its word.

"We have to do what is right," Rep. Dean Urdahl, R-Grove City, said. "The state has to live up to its contracts."

Rep. Rod Hamilton, R-Mountain Lake, said JOBZ has brought more than 14,000 jobs to rural Minnesota and needs to remain in force.

The Senate bill would end new JOBZ sign-ups, but businesses already in the program would continue to get tax breaks.

Overall, Gov. Tim Pawlenty promises to veto any higher state taxes.

But before a bill reaches Pawlenty, a conference committee must work out the vast differences between Senate and House bills. That work is to begin in the next few days, with the Pawlenty administration involved.

Among the keys to any tax decision will be how to help businesses, and, thus, improve the jobs picture.

Early this year, Pawlenty asked the Legislature to reduce a variety of business taxes, including the corporate income tax.

Cutting the corporate tax rate found little traction among Democrats who control the Legislature. At least, they said, that is not a good idea when the state faces a massive deficit in its next two-year budget.

Bakk's Senate bill would provide many business tax breaks to save jobs, including:

  • $247 million in tax credits to encourage investment in new businesses and repairing historic buildings.
  • Allowing the first 10 percent of a business income to avoid taxation.
  • Eliminate sales tax on capital business purchases, on the theory it will encourage more purchases.

House Tax Chairwoman Ann Lenczewski, DFL-Bloomington, produced a bill to eliminate dozens of what she called business subsidies "that are either outdated or we just plain can't afford them."

Still, the House bill provides tax breaks for research and development and lowers taxes for many small businesses and farmers.

While the Senate bill focuses on its $2.2 billion across-the-board income tax increase, which especially increases upper-income Minnesotans' taxes, the House measure splits increases among many areas.

The House income tax change increases taxes on joint filers earning more than $300,000 annually. Those richest Minnesotans would pay 9 percent of their income as taxes.

Democrats estimate that 1 percent of Minnesotans would pay that higher rate.

Also in the House proposal, tobacco taxes would go up 54 cents a pack and alcohol taxes would rise 3 cents to 5 cents per drink.

House Democratic-Farmer-Laborites also want to let counties raise taxes by a half percent instead of increasing property taxes. Both the House and Senate call for lifting existing limits on how much local governments may raise property taxes.

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In House and Senate debate, many lawmakers said that regardless of what the bills give in tax breaks, income tax increases send an anti-business message.

"Business is being spanked," Sen. Julie Rosen, R-Fairmont, said.

Pawlenty wrote to Bakk and Lenczewski to complain about their tax increases.

"Minnesotans are tightening their belts and making hard sacrifices to manage their family budgets," he wrote to Lenczewski Saturday. "State government needs to do the same."

Big tax increases would not sell in rural Minnesota, many greater Minnesota lawmakers said.

"I think the number was too big for the district I live in," Sen. Dan Skogen, DFL-Hewitt said, after voting against the $2.2 billion tax increase.

JOBZ needs to remain, he added, because it has helped Fergus Falls and Perham businesses in his district.

Some suburban Democrats also opposed the tax increases.

Sen. Kathy Saltzman, DFL-Woodbury, complained about how the new taxes on the wealthy would affect her district, one of the state's richer areas.

"That fourth tier is very hard to swallow in Woodbury," she said, adding it is a "deal killer."

If all income levels were treated the same, an income tax increase may be acceptable, Saltzman added.

The income tax debate overshadowed discussion about property taxes. Rep. Paul Marquart, DFL-Dilworth, tried to fix that.

"We said enough is enough on property taxes," said Marquart, chairman of the House property tax committee. "And this bill keeps property taxes in check."

While the House would slightly reduce local government aid in the next budget, it would return to 2009 levels in two years, Marquart said. That, combined with eliminating tax-increase limits, gives local governments a chance to continue essential services such as police and fire departments, he added.

The tax bill does a good job, Marquart said, in an economic recession. "The state of Minnesota is facing the biggest challenge ever."

Republicans said the tax bills affects too many people.

Rep. Morrie Lanning, R-Moorhead, said it kicks many segments of the economy that are down. For instance, he said, the House bill would eliminate a mortgage deduction at a time when the housing industry is hurting.

And, he added, it taxes heating oil in the cold winter.

Lanning's provisions of easing mandates on local government are good, he said, but they are "outweighed by some of the problems with this legislation.

Rep. Larry Howes, R-Walker, worried that if this bill is vetoed - as promised - it will send the Legislature into a special summer session.

"We are going to have to start this all over," Howes said. "As hard as everyone has worked on this bill, as passionate as people are on both sides, there just isn't enough time for bill No. 2."

Rep. Rod Hamilton, R-Mountain Lake, hushed the House chamber when he arose to talk about the tax bill, all remembering his status last year of being one of six Republicans to vote to override a governor's veto of a transportation tax increase.

"We need to remember it is not about us, it is about people we represent," Hamilton said. "Don't ever feel that you are forced to vote one way or another."

And, he added: "The vast majority of the people are not behind this. ... It is a tax bill on everyone in the state of Minnesota."

Bakk said new taxes are needed to help fix Minnesota's budget problem.

"It is easy to be against things. ... but this whole budget solution is predicated on this bill passing," he said. "Without this bill the budget cuts will be significantly deeper."

Here is how local representatives voted on a bill to raise taxes $1.5 billion:

Paul Anderson, R-Starbuck, no

Tom Anzelc, DFL-Balsam Township, yes

Karla Bigham, DFL-Cottage Grove, yes

Julie Bunn, DFL-Lake Elmo, no

Matt Dean, R-Dellwood, no

David Dill, DFL-Crane Lake, yes

Steve Drazkowski, R-Wabasha, no

Kent Eken , DFL-Twin Valley, yes

Andrew Falk, DFL-Murdock, yes

Tim Faust, DFL-Mora, yes

Pat Garofalo, R-Farmington, no

Rod Hamilton, R-Mountain Lake, no

Larry Haws, DFL-St. Cloud, yes

Bill Hilty, DFL-Finlayson, yes

Larry Howes, R-Walker, no

Tom Huntley, DFL-Duluth, yes

Al Juhnke, DFL-Willmar, yes

Tim Kelly, R-Red Wing, no

Lyle Koenen, DFL-Clara City, yes

Morrie Lanning, R-Moorhead, no

Bernie Lieder, DFL-Crookston, yes

Doug Magnus, R-Slayton, no

Paul Marquart, DFL-Dilworth, yes

Denny McNamara, R-Hastings, no

Mark Murdock, R-Ottertail, no

Mary Murphy, DFL-Hermantown, yes

Bud Nornes, R-Fergus Falls, no

Dave Olin, DFL-Thief River Falls, yes

Mary Ellen Otremba, DFL-Long Prairie, no

John Persell, DFL-Bemidji, yes

Tom Rukavina, DFL-Virginia, yes

Brita Sailer, DFL-Park Rapids, yes

Marty Seifert, R-Marshall, no

Tony Sertich, DFL-Chisholm, yes

Loren Solberg, DFL-Grand Rapids, yes

Phil Sterner, DFL-Rosemount, no

Marsha Swails, DFL-Woodbury, no

Dean Urdahl, R-Grove City, no

Torrey Westrom, R-Elbow Lake, no

Here is how local senators voted on a bill that increases income taxes $2.2 billion:

Thomas Bakk, DFL-Cook, yes

Steve Dille, R-Dassel, no

Michelle Fischbach R-Paynesville, no

Dennis Frederickson, R-New Ulm, no

Joe Gimse, R-Willmar, no

Bill Ingebrigtsen, R-Alexandria, no

Gary Kubly, DFL-Granite Falls, yes

Keith Langseth, DFL-Glyndon, yes

Tony Lourey, DFL-Kerrick, yes

Steve Murphy, DFL-Red Wing, yes

Mary Olson, DFL-Bemidji, no

Pat Pariseau, R-Farmington, no

Kathy Saltzman, DFL-Woodbury, no

Tom Saxhaug, DFL-Grand Rapids, yes

Katie Sieben, DFL-Cottage Grove, yes

Rod Skoe, DFL-Clearbrook, yes

Dan Skogen, DFL-Hewitt, no

Yvonne Prettner Solon, DFL-Duluth, yes

LeRoy Stumpf, DFL-Plummer, yes

David Tomassoni, DFL-Chisholm, yes

Ray Vandeveer, R-Forest Lake, no

Jim Vickerman, DFL-Tracy, yes

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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.
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