House tax bill sets up a 3-way battle

Cigarette taxes would go up by 54 cents a pack, the liquor tax would rise for the first time in 20 years and top income-earners would be subject to one of the highest tax rates in the country under a $1.5 billion tax bill presented Monday by House DFLers.

The bill also would eliminate a slew of tax deductions and close corporate loopholes, adding up altogether to what would be the most dramatic tax changes in a generation, were it to become law.

Defying Gov. Tim Pawlenty's threat to veto any tax hike, the bill marks the start of serious session end-game negotiations among DFLers in the House and Senate and the Republican governor. Senate DFLers will present their tax proposal today -- a $2.2 billion increase that will center largely on returning income taxes to close to their higher 1998 rates and adding a hefty fourth tier aimed at the state's wealthy, but which would leave tax deductions and so-called sin taxes untouched.

The contrast among the three approaches is stark and, set against a backdrop of an economy still gripped by a deep recession, could result in a three-way contest of wills.

'Let's have some courage'

"We've got a deficit, so let's have some courage around here and do some bold reform," said House Taxes Committee Chairwoman Ann Lenczewski, DFL-Bloomington, as she unveiled a bill that left some of her DFL colleagues fuming.

"The choices are not good," acknowledged Lenczewski, whose caucus also has called for spending cuts to attack the state budget deficit. "Cuts hurt people, tax increases hurt people. I don't think anyone has any joy about the situation. This is a reasoned, balanced approach to do both."

Brian McClung, spokesman for Pawlenty, had sharp words for the tax proposal. "It's bad enough that Democrats propose giving Minnesota one of the highest income tax rates in the nation and raising taxes on someone having a beer or a glass of wine," he said. "But they really go over the cliff when they propose to increase taxes for child care or for donating an organ. This is Democrats bringing Minnesotans death by a thousand taxes."

The bill would eliminate deductions for child care and expenses related to organ donation.

A far bigger bite is the fourth income tax tier of 9 percent, which would kick in at $300,000 of adjusted gross income for joint filers, $169,700 for single filers and $255,000 for heads of household. Those increases would be retroactive to January. The current top income tax rate is 7.85 percent.

But even the income tax increase would be eclipsed by the real moneymaker in the bill -- a controversial proposal from earlier in the session that would eliminate the popular home mortgage interest deduction. In its stead would be a mortgage-interest tax credit that tops out at $420. Property taxes would no longer be deductible on state income tax.

More for booze and smokes

The alcohol tax would go up three to five cents a drink -- an attempt, Lenczewski said, to recoup the $4.5 billion annual toll that alcohol imposes on the state. According to a state Health Department study, she said, the toll breaks down to $900 per Minnesotan per year -- far more, she said, than what anyone would pay in higher liquor taxes. The cost of cigarettes could soar much more than $6 per pack with the new tax increase, which comes on top of a freshly minted federal cigarette tax hike.

The bill's rocky path through the House was evident in the face of Rep. Tom Rukavina, DFL-Virginia, a key player among the state's Iron Range DFLers, who grimaced as he proclaimed himself "not enamored of a lot of this bill."

Senate Taxes Committee Chairman Tom Bakk, DFL-Cook, predicted that elimination of the mortgage interest deduction would be "very, very hard for the public to support," and could erode public support for an overall tax bill.

In addition to income tax increases, Bakk's only other significant revenue raiser is a 30 percent surcharge on banks that charge more than 15 percent interest on credit cards.

Lenczewski said negotiations to achieve a unified House position on major reforms did not come easily. "This is not a pleasant year to be a legislator," she said. "This is a really rough committee. We had people tossing things at each other during committee hearings."

But, she noted, "there is opportunity to think anew, to do something different than just subtracting or adding."

Patricia Lopez • 651-222-1288