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Rep. John Persell of Bemidji pays attention to debate Friday afternoon as fellow representatives discuss aspects of a $1 billion tax increase proposal. Pioneer Photo/ Don Davis

Legislature: DFL passes tax bill amid veto threat

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ST. PAUL -- Democrats pushed a $1 billion tax increase through the Minnesota Legislature Friday night, an alternative to larger hikes the House and Senate already approved.

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

The House approved the new tax plan 86-45 after a nearly five-hour debate Friday afternoon and the Senate followed with a 44-20 vote.

Lawmakers and Pawlenty have known since the 2009 legislative session began on Jan. 6 that they faced a $4.6 billion deficit as they prepare a two-year, $33 billion budget. However, so far they have not agreed on how to do that, and a Democratic leader hinted that the Legislature could attempt to override Pawlenty's expected veto of the tax bill.

The new tax plan moved at warp speed Thursday and Friday 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.

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

"This bill is about preserving our Minnesota values," House Majority Leader Tony Sertich, DFL-Chisholm, said of education and health-care funding.

Without the tax plan, some 12,000 teaching jobs and 15,000 hospital jobs could be lost around the state, Sertich warned. Also, hospitals stand to lose out on millions of dollars in state payments.

"Those are real numbers," Sertich said of hospital payment cuts.

The bill ups taxes on couples earning more than $250,000 annually. Those highest-earning Minnesotans would pay 9 percent of their wages to the state. The new rate could be repealed in 2014, but Republicans said that was unlikely.

Taxes also would go up on alcoholic drinks, the first increase in 22 years. Plus, the bill would add a surtax to credit cards that charge customers more than 15 percent interest.

In a letter to legislative leaders, Pawlenty called the measure "hastily processed and ill considered."

The governor asked leaders to get him the bill as soon as possible "so I can veto it immediately and leave a maximum number of days for better legislation to be considered and passed." Lawmakers face a May 18 constitutional deadline to adjourn for the year.

While Pawlenty said Minnesotans do not want higher taxes, House Speaker Margaret Anderson Kelliher, DFL-Minneapolis, said the public has told lawmakers that health care and schools are their priorities, so Democrats who control the Legislature opted to fund them with new taxes.

Kelliher said Pawlenty's budget plan would leave the state with a long-term debt because he proposes borrowing nearly $1 billion for the next two-year budget, paying it back over 20 years.

The speaker, who some predict will run for governor, was as harsh with Pawlenty as she has been in public.

"The governor has been more disengaged than I have seen in the last couple of years," she said, adding that he also is more inflexible.

"This governor is the permanent deficit governor," she said.

If Pawlenty vetoes the new tax bill the speaker predicted deeper state program cuts. Kelliher would not say if the $1 billion tax proposal would be the limit.

But a leading Republican on taxes predicted it was not Democrats' final tax offer. Rep. Morrie Lanning, R-Moorhead, said negotiations continue on the other tax-raising proposals.

"Nothing else is off the table," Lanning said. "This is another idea that we have before us, but these other things may still come along."

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

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

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

Sertich said that Pawlenty will veto the bill, but lawmakers may see it again in the session's final days. Democrats could attempt to override Pawlenty's veto.

"That's not the end of the story for this bill, though," Sertich said of a veto. "This will still be a choice left on the table for us to make in the next 10 days."

Debating the new tax bill was the main activity around the Capitol Friday, but there was other work as well. And today, legislative leaders said, major budget conference committees will continue their work in hopes that most remaining money-related bills can be debated by the full Senate and House Monday and Tuesday.

After Pawlenty vetoed a $263 million economic development funding package late Thursday, negotiators went back to work Friday. They put together a revised finance bill that did not include an item Pawlenty objected to - a provision forgiving $33 million in loan payments for St. Paul. The city wanted that money to help build a new ice rink.

The Senate approved the revised economic development bill 47-13.

Pawlenty signed a $4.3 billion transportation package. It funds Twin Cities-area and rural Minnesota transit programs at lower levels than the current budget and provides grants to local governments for bridge work.

The governor also signed a bill funding environment and energy programs, although he struck a provision that would have spent $15 million for water cleanup. He said the bill takes the money from a fund that will be nearly insolvent.

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

The tax bill debate split Democrats and Republicans.

DFL lawmakers said the tax increase will allow the Legislature to not make more spending cuts beyond what has been proposed.

"If we don't get the revenue, the cuts will be worse," Huntley said of health-care spending cuts.

The GOP criticized the tax increases and the bill's hasty preparation.

Rep. Rod Hamilton, R-Mountain Lake, said lawmakers were not provided information about how the tax bill would affect overall spending on education and health care.

"It's extremely difficult here to vote on something that we don't have all the details on," Hamilton said.

Lawmakers said the alcohol tax increases could put Minnesota at a competitive disadvantage because neighboring states have lower taxes.

"Those bar and restaurant operators have already lost 30 to 40 percent of the revenues to Wisconsin because of our cigarette taxes and we're going to sock them with another one," said Rep. Steve Drazkowski, R-Wabasha, who represents southeastern Minnesota counties.

Local votes

Here is how local senators voted on a bill raising taxes $1 billion:

Mary Olson, DFL-Bemidji, yes

Rod Skoe, DFL-Clearbrook, yes

Here is how local representatives voted on a bill raising taxes $1 billion for public school education and health-care:

Larry Howes, R-Walker, no

John Persell, DFL-Bemidji, yes

Brita Sailer, DFL-Park Rapids, yes

Don Davis and Scott Wente work for Forum Communications Co., which owns the Bemidji Pioneer.

Y mnbureau@forumcomm.com

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