House passes bill carrying tax hikes - and a veto target

A day after the Senate approved a bill raising income taxes at most levels, the House narrowly pushed through a multifaceted tax package Saturday that would raise taxes on upper-bracket earners, replace mortgage interest deductions with tax credits and take a deeper slice out of smokers and drinkers.

The DFL-crafted House bill, which would raise $1.5 billion to help close the state's daunting $4.6 billion budget deficit, strikes a middle posture between the DFL Senate's $2.2 billion plan and Republican Gov. Tim Pawlenty's $1 billion measure that raises revenue through bond sales rather than new taxes.

Pawlenty, however, seemed as little impressed with the House bill as he was with the Senate package. Even while the tax debate raged on the House floor Saturday evening, Pawlenty vowed to veto the bill and said he was "deeply disappointed" that legislators would raise taxes "in these challenging times."

"Your bill creates a new income tax rate placing Minnesota in the unenviable position of being tied for the fourth-highest tax rate in the country," Pawlenty wrote in a letter to Rep. Ann Lenczewski, DFL-Bloomington, chairwoman of the tax committee.

Debate at times was heated as defenders of the package sought to portray it as badly needed reform legislation that also solved the state's deficit, and opponents darkly warned that the bill would hurt Minnesotans at all levels and, by striking several deductions, low-income citizens most of all.

Minority Leader Marty Seifert, R-Marshall, told members that the legislation was "the single worst bill" he's seen in his 12 years in the House.

To DFLers, Seifert said: "Think about your constituents, not about what your party leadership is telling you to do."

Eighteen DFLers took Seifert's advice, joining all 47 Republicans in voting against the bill. But those 65 nays fell just short of the 68 votes that the majority mustered to pass the bill.

Lenczewski rose just before the vote, which came shortly before 9 p.m., to answer some of the criticism.

She compared many of the provisions changing or eliminating deductions and exemptions to what former President Ronald Reagan, a sainted name in GOP circles, tried to do with federal tax provisions 20 years ago -- thoroughly annoying several Republicans.

"It's a balanced, fiscally prudent approach," she said. As for the new top-tier income tax rate, Lenczewski said: "We're asking those who aren't down to pay a little more ... not a lot more."

The House bill would create a new income tax rate of 9 percent for a married couple filing jointly and making $300,000, for heads of households making $255,000 and for single filers making $169,700. The current top rate is 7.85 percent.

Other new taxes in the bill would raise the price of an alcoholic drink by 3 to 5 cents, and add 54 cents to a pack of cigarettes. DFLers said that both taxes are aimed at covering the health costs of Minnesotans suffering from the effects of smoking and drinking.

Perhaps the most controversial measure is the elimination of the mortgage deduction. Under the bill, it would be replaced with a limited $420 tax credit -- translating into another significant income tax increase, Republicans said.

Credits capped at $200 per child would replace deductions for child care and education. The bill also would drop deductions for child care and expenses related to organ donations, and close some corporate loopholes.

Kevin Duchschere • 651-292-0164