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Court loss to cost state up to $300 million
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Republicans on Tuesday began an around-the-clock vigil outside DFL Senate Majority Leader Dean Johnson's office to try to jumpstart budget talks. Rep. Karen Klinzing, R-Woodbury, shown with her daughters Kathleen, 6, and Emma, 3, says lawmakers are frustrated with the lack of progress. (MPR Photo/Laura McCallum)
The state's projected budget deficit could swell by another $250 to $300 million in the next two years even as lawmakers and Gov. Tim Pawlenty are struggling to erase a previous shortfall. On Tuesday state revenue officials estimated a recent Minnesota Supreme Court case could add to the state's fiscal woes. The new pressures come with only eight days left before the budget impasse could force a partial government shutdown. But lawmakers say they don't expect the latest news to significantly complicate the already contentious budget debate.

St. Paul, Minn. — The latest grim news comes after the state Supreme Court ruled earlier this month in favor of Hutchinson Technology. The Minnesota-based computer firm had sought state tax breaks for portions of its overseas income. State officials had argued that the company didn't qualify for the exemptions. The court said otherwise.

Now, revenue officials estimate the state may owe hundreds of millions of dollars to Hutchinson and other companies that may now step forward to press similar claims. Revenue Commissioner Dan Salomone says that, as a first response, Minnesota should change its tax laws to stop the drain on future revenues.

"The Legislature and the governor need to focus on the prospective problem, change the law so we basically stop the bleeding, revenue loss," he said.

Salomone says such an amendment could wipe out a third of the ruling's fiscal impact. The remainder -- as much as $200 million -- would still be owed to companies as rebates on previous tax bills.

Lawmakers from both parties and both the House and Senate suggested that that liability can be spread out over several years and shouldn't necessarily be part of the current budget discussion. They say that, instead, they'll stick to the official state budget forecast prepared last February, well before the court ruled in the Hutchinson case.

A new forecast that would take into account the court ruling isn't due until November. Still, the news has stirred the budget pot at the Capitol. Senate Democrats have argued for more than a year that the state should eliminate or restrict longstanding corporate tax breaks meant to spur Minnesota companies to compete globally.

Senate Taxes Committee Chair Larry Pogemiller of Minneapolis say the latest news supports that case. He also says the hit to the bottom line could provide cover for Gov. Pawlenty to call for new tax dollars in general.

"I hope that that creates an opening for the House and the governor to be a little more realistic about the revenue challenge here," he said.

But Pawlenty seemed to downplay the urgency of the court ruling's impact. Revenue Commissioner Salomone also sounded a cautious note. He says tinkering with the tax code should be narrowly tailored to change only the parts relevant to the Hutchinson case, and shouldn't include the broader revisions favored by Democrats.

"We have to be very careful here that whatever we do does not create a lot of unintended consequences. There are a lot of jobs potentially that could be affected by a mistake in this area, a lot of large corporations who could potentially be hurt if we are not careful to treat this as a very, sort of, surgical problem," he said.

In fact, on the House side, Republican leaders questioned whether even a "surgical" correction was necessary. Phil Krinkie of Shoreview, who chairs the House Taxes Committee, says he's not convinced that the Hutchinson case exposes any flaws, and that perhaps the law is working exactly as designed.

"If you start to raise dramatically corporate taxes in the state of Minnesota, whether they be income tax or property tax, you will have an impact on job-creation in the state of Minnesota," he said.

Krinkie says rather than rewriting the tax code, the state should simply lower its expectations on the spending side, either in K-12 education or, perhaps, public health programs. Disagreements over those two areas were driving the budget impasse well before the Hutchinson case was decided, meaning, in the end, the two sides are no closer together -- but perhaps no further apart -- than they have been all along.

Meanwhile, House Speaker Steve Sviggum welcomed residents into his office as lawmakers sought new ways to break the budget stalemate.

Sviggum, R-Kenyon, said he wanted to hear ideas on how to reach a budget deal and finish the five-week-long special session.

Dozens responded. Among them was Anna Graziano, a 13-year-old from St. Paul who joined a group of metro-area parents who snagged a 15-minute appointment with the speaker. They told him they backed higher taxes to boost school funding and prevent cuts to child care and health care.

"It started off OK but in the end, he was being kind of mean," said Graziano, who rested her sunglasses on top of her head and carried a beaded bag. "He wasn't really respecting anyone's views besides his own."

Sviggum and most other House Republicans oppose most tax increases and support cuts to reduce rapid growth in subsidized health care costs. The speaker insisted that he remained respectful during the meeting, but had to stick to his schedule, which was booked solid.

Gov. Tim Pawlenty warned state employees in a letter Tuesday that a July 1 shutdown was drawing near. The Republican governor said he will seek court authority to keep critical services going and help 15,700 workers who would be laid off.

But Republican Rep. Kurt Zellers of Maple Grove wasn't showing the strain yet as he sat cheerfully in a lonesome swivel chair in the marble corridor outside the office of Democratic Senate Majority Leader Dean Johnson.

Zellers and other House Republican members who don't get to participate in budget negotiations started a round-the-clock vigil outside Johnson's office Tuesday morning.

They want to show they're ready to help finish a budget any time of day or night, said Zellers, who answered letters from constituents and jotted down notes on DFL leaders' comings and goings during his two-hour shift.

"We're here. We're ready to help in any way," Zellers said. "It's a way to participate."

Julie Anderson carried a framed photograph of her two beaming daughters - 7-year-old Carina and 9-year-old Maren, who has Down syndrome - to the meeting with Sviggum Tuesday. She said she doesn't want to choose between schools and health services for the disabled because her family needs both.

The Roseville mom wore shorts and said she only had time for the trip because her husband had the day off. "If you don't put a face on it, it's so easy to say, `Well, forget about that,"' Anderson said.

The Associated Press contributed to this report.