Senate OKs $1 billion tax increase

DFLers powered a nearly $1 billion income tax increase through the Minnesota Senate on Saturday, virtually guaranteeing a showdown with Gov. Tim Pawlenty on his signature issue of holding down taxes.

The bill would create a top Minnesota tax rate of 9.7 percent, giving the state the highest top income tax rate in the nation. It passed the Senate on a 35-29 vote, with seven DFLers defecting.

The new tax would pump $444 million into K-12 schools, vastly increased preschool options and tuition relief over the next two years, and lower homeowner property taxes.

Republicans strenuously objected to the tax. But Senate Majority Leader Larry Pogemiller, DFL-Minneapolis, said the state had serious choices to make.

Years of budget tightening and earlier tax cuts aimed at the rich have harmed the middle class, he said, and brought the state to a crossroads.

"Will this generation pay the price?" Pogemiller asked during a rare Saturday floor session. "Will we do the hard thing? Will we talk to Minnesotans honestly about what the real choices are for our children?" Senate Republicans argued that the proposed increases would slow the state's economic engine, stifling job growth and driving wealthier Minnesotans from the state.

"Parents, turn your children over to us," said Sen. Ray Vandeveer, R-Forest Lake. "You might as well, you're not going to have any money yourself to take care of them."

Even some DFLers expressed anxiety over the lofty tax rate. Among the DFL defectors were five freshmen DFL senators who replaced Republicans in the last election.

"The price tag seemed a little steep for my district," said Sen. Sandy Rummel, DFL-White Bear Lake. "I want to be more moderate. I think we might have to increase income taxes, but not that much."

Sen. Kathy Saltzman, DFL-Woodbury, called it an "extremely difficult vote for me" but said she was "very uncomfortable" with voting for the nation's top tax rate.

Saltzman and most other DFLers did say they hoped to bring the rate down a bit so they could support a more moderate tax increase and the spending that could go with it.

"I'm not a hard 'no' vote at all," said veteran Sen. Ann Rest, DFL-New Hope. "After a few adjustments, I'll be the first green vote up there. I believe a correction to the tax system is needed. This one just went over the top."

How the tax would work

Minnesota now has three tax rates. Taxpayers pay the lowest rate -- 5.35 percent -- on the first strata of their income. They pay a slightly higher rate on the next strata. At the higher levels of income, the top rate now is 7.85 percent. Under the Senate plan, taxpayers with federally adjusted gross incomes of $250,000 per couple and $141,250 for singles would pay the new rate of 9.7 percent on the income earned above that threshold. For heads of household the threshold would be $212,500.

That would bring the tax burden for the state's wealthiest 93,000 tax filers more into line with middle class earners, Senate DFLers said. A recent state Revenue Department report showed that top earners now pay about 9 percent of their income in taxes while middle-range filers tend to pay closer to 12 percent.

"This is about investment, but it's also about fairness," Pogemiller said. "There is a basic unfairness to the system right now and we're going to correct that."

House tax proposal smaller; Pawlenty opposes it, too

House DFLers have a similar income tax proposal pending, although their suggested top rate is only 9 percent and is designed to fall mostly on incomes above $1 million.

Pawlenty has consistently pledged to veto any income tax increase.

"The Senate is saying that it's OK to jack up taxes dramatically and have state spending go up approaching 15 percent," Pawlenty said on Friday. "On my side of the ledger I say the state should live within its means, especially when it has a surplus. Ten percent (new spending) is enough."

DFLers and Republicans have fought all session long over whether the state has an actual surplus. About half of the $2 billion surplus forecast for the state is one-time money that DFLers contend should not be used for ongoing expenses. The rest, they say, barely covers a modest rate of inflation. Republicans say there should be no automatic increase for inflation and that money is available to allocate as new spending.

As a result of Saturday's action, the Senate is now much closer to the House in terms of additional total dollars to be spent on education from pre-K through high school levels in 2008-09.

For instance, the Senate now would allocate nearly $850 million of new spending for preschool through high school programs The House has proposed more than $970 million for new pre-school and K-12 spending.

Those figures are not exactly comparable because the components of the two education plans don't exactly match. But subtract $125 million in property tax relief included as part of the House total, and the increases for pre-K through high school spending are very close for both chambers.

The big differences lie in where the money is going. Much of the Senate allocation for K-12, for instance, is still earmarked for helping schools pay off big debts incurred for children with learning disabilities and other special education needs. The House, on the other hand, puts much of its new money into funding all day kindergarten and giving schools bigger raises than the Senate in basic education funding. Both plans would help lower tuition costs.

Pawlenty has proposed $760 million in new funding for K-12 education, with about $570 million going to permanent school funding, and the rest going to targeted one-time increases.

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