Senate OKs $1 billion tax increase

  • Article by: PATRICIA LOPEZ and NORMAN DRAPER , Star Tribune
  • Updated: March 31, 2007 - 9:34 PM

A showdown with the governor is expected over what would be the nation's highest income tax. The House's proposal is similar but smaller.

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.

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