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House joins Senate in passing tax increases to fill budget hole

Rep. Lyle Koenen of Clara City follows debate Saturday as Minnesota representatives meet in a rare weekend session. Members debated a transportation bill and whether to raise Minnesota taxes. House members ultimately approved raising a variety of taxes on a 68-65 vote. (Tribune photo by Don Davis)

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.

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 on Saturday night passed a bill 68-65 that would raise a variety of taxes $1.5 billion. Senators on 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 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 be-tween 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.

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 DFL'ers 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.

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.