Despite a governor vowing to veto the bill as soon as he can "get the cap off the pen," the DFL-controlled Minnesota House and Senate voted Friday for a bill that would raise income taxes on the wealthiest 2 percent of Minnesotans, boost alcohol taxes by four to five cents a drink and throw a hefty surcharge on credit card companies that charged high interest rates.

The bill would raise $1 billion over two years and dedicate the money to schools, hospitals and nursing homes. It would, DFLers say, take the place of Republican Gov. Tim Pawlenty's proposal to borrow a similar amount through appropriation bonds.

The House's approval came on a 86-45 vote. Later in the evening, the Senate passed the bill 44-20.

Passage of the bill sets up a showdown with the governor, who has refused to consider tax increases as a means of solving the state's $4.6 billion deficit.

Before the House vote, Speaker Margaret Anderson Kelliher, DFL-Minneapolis, said DFLers have tried to compromise with Pawlenty, making even deeper spending cuts than he had, but DFLers had been frustrated by what she called his "tremendous stubbornness in attitude."

If he remained inflexible, she said, legislators "will be left with only one choice, and that is to attempt an override."

DFLers have successfully overridden the governor only once before, when they peeled off six Republicans in 2007 to increase the gas tax. This time, because of bulked-up numbers from the 2008 election, the DFL would need all of its members and only three GOP votes in the House. Senate DFLers already have a veto-proof majority.

Going to the mat

"This is a defining moment of this session," said Rep. Paul Marquart, DFL-Dilworth. "With 10 days to go, this is a game-changer. It breaks our logjam and moves us closer to a successful session and one we can get done on time."

But Marquart and others signaled that, having found unity on a select number of taxes, DFLers may be prepared to go beyond the scheduled May 18 adjournment, if necessary. "We are willing to go to the mat to protect our senior citizens, our young families, our students," Marquart said. "Dollar for dollar, dime for dime, this money goes to fund our most cherished priorities."

In a letter to House and Senate leaders before the votes, Pawlenty, too, sounded determined to resist what he called "a hastily processed and ill-considered tax increase proposal."

Pawlenty asked in the letter that the Legislature send him the bill "today so I can veto it immediately and leave a maximum number of days for better legislation to be considered and passed."

House Minority Leader Marty Seifert, R-Marshall, called the legislation "a really bad bill ... cobbled together in the dark of night," that would leave the state with one of the highest alcohol taxes in the country and the fourth-highest income tax rate.

Sen. Geoff Michel, R-Edina, said the bill would kill jobs. "We're going to get to watch the governor play catch-and-release," he said, playing on today's state fishing opener. "This is going to be the fastest veto in the history of Minnesota."

Who pays

The bill is the product of a late compromise between House and Senate DFLers after they realized they could not get enough support even from their own members for earlier and far heftier tax proposals. This bill limits its bite to a fraction of the population and those taxes that polls have indicated a majority of Minnesotans support.

More than 65 percent of the income taxes would be paid by those who net more than $1 million a year and 94 percent of small businesses would see no change in their tax bills, according to nonpartisan House research. The income tax hike is scheduled to sunset in 2014 if the state is in the black by then.

Pawlenty and GOP legislators have insisted that higher income taxes would further damage a fragile economy and could send jobs out of the state.

But DFLers countered that health care has become a major industry in the state, with hospitals and nursing homes providing not only a valuable service, but economic lifeblood to struggling rural areas. They expect to bring that last point home to Republican legislators with nursing homes and hospitals in their districts that are on the point of financial ruin.

While a number of Republicans pledged on the floor that they would not be swayed, House Taxes Committee Chairwoman Ann Lenczewski, DFL-Bloomington, urged them to keep an open mind. "We know that sometimes people think anew when they have to make choices," she said. "If there are people who want to say they value million-dollar earners over our schools, our health care, vote no. I didn't come here to raise taxes, but I didn't come here to dismantle Minnesota."

As distasteful as raising taxes might be, she said, the alternative was Pawlenty's "debt-borrowing scheme" that would keep the state paying interest for years.

Sen. Tom Bakk, the Senate Taxes Committee chairman, said the bill was hardly perfect. But borrowing money to close the deficit, he said, was "unacceptable."

The bill also would make a potentially major change to Minnesota's credit card market, with a special 30 percent surcharge tacked on to earnings a company made from interest rates above 15 percent.

Kelliher said the provision was intended to rein in companies who were "gouging their customers," and would produce $230 million over two years. But Republicans warned of unintended consequences.

"In the last 10 years I don't think I've seen a tax provision more imprudent," said Revenue Commissioner Ward Einess. "This has the possibility of having a permanent credit crunch in this state." He predicted that costs would be passed on to consumers and could result in far tighter credit.

Deeper cuts

Even with the $1 billion tax increase, DFLers must still find an additional $500 million to $700 million to bring their budgets into balance. That could well mean additional cuts to every major part of state government, including schools, health care, public safety or higher education.

DFLers are trying to avoid Pawlenty's level of health care cuts, which would eliminate eligibility for 113,000 Minnesotans by 2011, when federal bailout money runs out.

"This is a sham," said Rep. Sarah Anderson, R-Plymouth. "This is your idea of bold leadership? I think it's time for you to step aside."

But House Majority Leader Tony Sertich, DFL-Chisholm, said he recalled the last time the state had to fill a $4.5 billion shortfall, just after Pawlenty took office in 2003. That year, he said, schools were cut and the remedies fell heaviest on the state's most vulnerable citizens.

"Bad things happened in this state," he said. Now, he said, the time had come to stop saying no and "try to say yes."

Staff writer Kevin Duchschere contributed to this story. Patricia Lopez • 651-222-1288