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Income tax hike advances in Senate
by Michael Khoo, Minnesota Public Radio
May 5, 2005

Sen. Larry Pogemiller says the extra revenue is crucial to pay for increases in K-12 education spending, for state aid to cities and counties, and to maintain the state's publicly-subsidized health care system. (MPR Photo/Michael Khoo)

Minnesota's wealthiest citizens could see a big jump in their income taxes under a plan adopted Wednesday night by the Senate Taxes Committee. On a 7-to-5 party-line vote, DFL members of the committee voted to raise nearly a billion dollars in new taxes by creating an 11-percent income tax bracket for households among the top 10 percent of earners. The plan was immediately condemned by House Republicans and Gov. Tim Pawlenty's administration.

St. Paul, Minn. — Since before his election, Gov. Pawlenty has been steadfast in his pledge not to raise general state taxes. But the DFL-controlled Senate is about to put that resolve to the test.

"I'm hoping for the governor to bend and compromise," said Minneapolis Democrat Larry Pogemiller, who chairs the Senate Taxes Committee.

The Senate plan would raise an estimated $975 million over the next two years by taxing high-level incomes at 11 percent; that's up from the current maximum rate of just under eight percent.

For married, joint filers the new rate would kick in on taxable incomes over $250,000 a year. For unmarried taxpayers the threshold is just over $166,000. In all, fewer than 43,000 Minnesotans are expected to be hit by the new rate. And Pogemiller says even then they'd still pay a smaller percentage of their income in total state and local taxes than do middle-income households.

Pogemiller says the extra revenue is crucial to pay for increases in K-12 education spending, for state aid to cities and counties, and to maintain the state's publicly-subsidized health care system. He says lawmakers have already signalled an appetite to make those investments.

"Every bill on the Senate floor has been bipartisan, every bill that spends and invests. Someone's got to pay for that. The tax committee just decided how to do that," he said.

But Pawlenty spokesman Brian McClung says there's no doubt that if such a tax hike landed on the governor's desk, it would be immediately vetoed. McClung says it would give Minnesota the highest top tax rate in the nation and penalize many small businesses whose tax burdens are computed based on the individual income tax.

"I think in a lot of ways, though, we're about to see a test. We're going to see who controls the DFL. Is it the tax-and-spend Minneapolis liberals? Or is it the common-sense prairie populists they'd like you to believe they are?" McClung said.

In addition to the income-tax hike, the Senate bill includes an increase in a statewide business property tax. It also eliminates a tax credit meant to encourage Minnesota companies to compete in worldwide markets. Taken together, the Senate bill raises more than $1.4 billion.

Republican House Speaker Steve Sviggum says that for weeks he's and the governor have been urging Democrats to lay out their budget plans, but that he can't take the latest proposal at face value.

"It's on the table and it's ridiculous," Sviggum said. "Tell them to go back to the table! Tell them to go back to the table!"

Sviggum notes that even under budgets advanced by the governor and House Republicans, spending continues to increase. It's just not at the rate many Democrats favor.

"We're increase spending by $2 billion; that's eight percent over the biennium. You can't lose those numbers. That ought to be sufficient. That ought to be enough. And, you know, for the Senate to be looking at a $1.4 billion increase on top of that, they're so wrong. They're going to kill jobs, Sviggum said.

The Senate income-tax hike is designed to be temporary. It would disappear once the state's $466 million projected budget deficit is corrected and remains so and once an estimated $1 billion in previous accounting shifts and delayed payments are settled up.

Despite Sviggum and Pawlenty's condemnations, not all Republicans were dismissive. Bloomington Sen. Bill Belanger, the tax committee's top GOP member, says because the extra income tax burden will fall on so few households, it's unlikely to seriously disrupt the economy. And he says the only reason he voted against the tax hike -- and will continue to vote against it -- is because of the threatened veto.

"It's the first time that I've ever had a governor take anything off the table. I've always been able to negotiate with the governor before. We're not able to do that this year," according to Belanger.

Asked if there was any reason to oppose the plan other than the veto threat, Belanger said "probably not."