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A House-Senate conference committee discusses a new tax bill during a hearing early Friday morning. Staff photo by Scott Wente - Minn. State Capitol Bureau

New tax increase moves at warp speed

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ST.PAUL - Democrats were poised to pass a $1 billion tax increase today, an alternative to larger hikes the House and Senate already approved.

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And Gov. Tim Pawlenty was poised to veto the measure, forcing money talk to begin anew 10 days before the Legislature's constitutional deadline to adjourn.

Lawmakers and Pawlenty have known since the 2009 legislative session began on Jan. 6 that they faced a $4.6 billion deficit as they write a two-year, $33 billion budget. However, so far they have not agreed on how to do that.

The new tax plan moved at warp speed Thursday as Democratic-Farmer-Labor Party leaders tacked it onto what normally is a routine bill making technical changes to tax laws. A newly formed House-Senate conference committee finished the work in the wee hours of Friday, readying it for full House and Senate votes this afternoon or tonight.

The bill would use the new tax money to fund education ($588 million), nursing homes and long-term care facilities ($288 million) and hospitals ($114 million).

The bill ups taxes on couples earning more than $250,000 annually. Those highest-earning Minnesotans would pay 9 percent of their pay to the state.

Taxes also would go up on alcoholic drinks. Plus, the bill adds a surtax to credit cards that charge customers more than 15 percent annual interest.

A key House tax leader said the tax proposal is a compromise. Rep. Paul Marquart, DFL-Dilworth, said the $1 billion in new taxes replaces a Pawlenty proposal to borrow that amount.

"We are coming down to his level," said Marquart, chairman of the House property tax committee.

Still, he said, "it wasn't easy" for Democrats to support the proposal.

Marquart said he hopes public pressure will convince Pawlenty to support the bill.

However, the Republican governor left no doubt on his Friday morning radio show that he will veto it as soon as it hits his desk. Republicans say they will back that veto, preventing the Legislature from overriding it.

Marquart said that even if the bill is vetoed, legislators have "quite a bit of time" to work out a new deal.

Senate Taxes Chairman Tom Bakk, DFL-Cook, said there are "stark differences" between the already-passed House tax plan that raises $1.5 billion and a Senate bill that increases taxes by $2.2 billion. A conference committee established to settle differences between their first tax bills has made little progress.

There is little support for Pawlenty's plan to borrow money, Bakk said, so lawmakers compromised by lowering their tax increases.

"If not this, then what?" he asked.

Marquart, one of the tax negotiators, called the bill "a defining moment of this session" at about 12:15 a.m. in front of a Capitol hearing room full of lobbyists. At 1 a.m., the conference committee voted 9-1 to send the bill to the House and Senate floors.

"We'll just let the Democrats get the tax increases out of their system early," said House Minority Leader Marty Seifert, R-Marshall.

There was little good news today about a smooth end for the legislative session.

Pawlenty vetoed an economic development funding package, although he signed into law a non-controversial transportation budget bill.

In a letter to lawmakers, the governor said he agreed with most of the $263 million economic development bill, but had to veto the entire package because he could not veto two provisions he opposed. One provision was forgiving $33 million in loan payments for St. Paul, which would have allowed the city to build a new ice rink.

"For the sake of Minnesota's workers and our economy, we will get back into our conference committee and redo this bill in order to preserve the core economic development programs Minnesota needs in these difficult economic times," said Rep. Tom Rukavina, DFL-Virginia, chairman of the House economic development committee.

Pawlenty put his signature on a $4.3 billion transportation package. It funds Twin Cities-area and rural Minnesota transit programs and provides grants to local governments for bridge work.

Those were among the first two spending bills the Legislature sent to Pawlenty. He still is considering an environment finance bill.

The governor also signed a bill funding environment and energy programs, although he struck one minor provision.

Negotiations on a public works funding bill, that includes more than $60 million for flood prevention, continue today. Rep. Alice Hausman, DFL-St. Paul, said the House and Senate pretty much agree on borrowing $300 million for projects such as fixing college buildings, but Pawlenty says that is too much to spend during a recession.

The biggest spending bill, one funding health and human services programs, also is stalled.

"We are sort of at a roadblock," Rep. Tom Huntley, DFL-Duluth, said. "We are going to need some help from leadership."

Huntley said the biggest hang-up is over a Senate proposal to take money from an insurance fund, which Huntley said does not belong to the state and would be illegal to use.

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