Adding a fourth individual income tax tier and adjusting all tax rates responsibly balances the state budget for four years, says Minnesota Senate Taxes Chairman Tom Bakk.
While the tax increase flies in the face of Republican Gov. Tim Pawlenty's pledge to veto any state tax increases, Bakk, DFL-Cook, says the Senate proposal is the only one that leaves the state budget in the black four years from now.
":This is a mammoth deficit," Bakk said Thursday in a telephone interview. "You can't solve this by just dinking around the edges."
The state faces a $6.4 billion deficit in the next two-year budget cycle that begins July 1. One-time federal economic stimulus monies, however, will lower that deficit to $4.6 billion. The Senate proposes $2.2 billion in tax increases and the rest in cuts, many in 7 percent across-the-board reductions where stimulus funds aren't eligible.
The Senate, though, ends up with a balanced budget through two bienniums, Bakk said. The House DFL bill leaves a $1.8 billion deficit in the 2012-13 biennium, he said, while the governor's proposal leaves a $2.5 billion deficit in four years.
"The Senate's bill is balanced because we're doing permanent revenue that blinks off when the budget's in structural balance," Bakk said. "It will be in place for this biennium and the next."
The DFL Senate, which is veto-proof, proposes adjusting the current three individual income tax brackets and adds a fourth-tier bracket and rate. The new rates are for tax years 2009 through 2013, with provisions to return to current rates when the budget is structurally balanced.
The new rates boost taxes from 5.35 percent to 6 percent, from 7.05 percent to 7.7 percent and 7.85 percent to 8.5 percent. The new fourth tier would be set at 9.25 percent, starting with taxable net incomes of $250,000 for married couples filing jointly and $141,250 for single taxpayers.
"I just think handing off to the next governor and the next Legislature a balanced budget is important," said the Cook Democrat, who is also a 2010 candidate for governor. "Leaving a deficit behind for them to immediately have to deal with when they get here doesn't seem responsible to me."
The Senate DFL Caucus had talked about an income tax surcharge, as was done to balance the budget in the early 1980s, but settled on adjusting the permanent tax brackets, he said. At that time, a 10 percent surcharge was added, which blinked off when the budget was balanced, including leaving a "rainy day" budget reserve.
"It would have raised the same amount of money," Bakk said, "but we felt the better argument was to look at some of the tax cuts that we made in 1999 and 2000. We made two rounds of income tax cuts. Let's just admit we made them and they weren't sustainable. We've had structural deficits going on,
"When the economy was really operating at its pinnacle, we cut taxes too far," he added. "When the economy slowed down, and it started happening in 2002 when Pawlenty was elected with a $4 billion deficit ... we slipped into deficits."
Rather than go the surcharge route, Senate Democrats said it would be better to say the prior tax cuts caused structural imbalance in the budget and need to be restored, he said.
"The only difference is we put the fourth tier on to try to make the income tax system more progressive," he said. "You can argue that middle income people pay a higher percentage of their income than people making over $250,000."
Bakk said the Senate tax bill is also kinder to state aids to cities and counties through Local Government Aid and County Program Aid than either the House or governor. Reductions amount to only holding the line, preventing inflationary increases from taking place.
Pawlenty proposes a 23 percent cut in LGA, "which would be devastating" to cities which already had LGA cut through unallotment for 2009 when levies are already set, Bakk said.
Both the House and governor's budget proposals would shift school payments into the following biennium, Bakk said. The House bill also tinkers with too many tax credits and aids, while the Senate bill simply adjusts the tax tables.
Pawlenty proposes to make up a $1 billion of the deficit by issuing bonds, paid back by the ongoing settlement the state has with Big Tobacco. Bakk said the Senate will draw the line there in opposing the measure, which will cost $600 million in interest alone. The House already took a vote against the measure, 130-4.
"This is the Senate's starting point," Bakk said of the bill, which still must be negotiated with the House before being presented to Pawlenty. While the Senate could override a Pawlenty veto, Bakk said chances of overriding it in the House are dim.
"I'm not interested in negotiating out a tax bill the governor's going to veto," Bakk said. "But we do need to negotiate something out. Even if we agreed to his shift, which I'm not overly critical about ... but I couldn't use the shift and then stay in balance in the next biennium."
Pawlenty may win an argument over allowing the second biennium to face a deficit, he said, "but he still has the $1 billion tobacco bond that I refuse to do."
A point of compromise may be the income tax surcharge, Bakk admitted, since the governor likes to turn a phrase. The 75-cent cigarette tax Pawlenty pushed in 2005 was OK as a "health impact fee" rather than a tax, Bakk remembers.
"The question is what can we find that he cannot call a tax increase," Bakk said. "I think it's going to kind of be a play on words. Frankly, could he call an income tax surcharge a surcharge instead of a tax? I guess we'll find that out."