House passes measure aiming to remake state tax picture

A bill that seeks to dramatically alter the Minnesota tax landscape, increasing property tax relief for some while wiping out the property tax deduction on state income taxes for all, won approval in the state House on Monday night.

"We're targeting relief to those who need it most," Rep. Ann Lenczewski, DFL-Bloomington, said before the bill was approved on a 80-52 vote. "This is part of moving us to a progressive tax system."

Under the bill, homeowners who make less than $100,000 would be eligible for the most property tax relief. But the new system would be tricky, with relief tied to income and home value. That means some middle-class homeowners would end up with a net loss of tax benefits.

A state Revenue Department analysis shows that nearly a third of homeowners would see an average increase in tax benefits of $330 in 2009. But 37 percent -- 560,000 home- owners -- would lose an average of $220, in part through the loss of their property tax deduction.

Another 483,000 would see virtually no change.

To Pawlenty, a disguise

Gov. Tim Pawlenty said earlier Monday that "the numbers show that it is a net tax increase on a majority of households. It's a disguised way to raise the income tax to buy down the property tax without also any reform in the system, so we would take a dim view of that proposal."

"If we do nothing, we know that 1.5 million Minnesotans will see a property tax increase," said Rep. Paul Marquart, DFL-Dilworth.

DFLers contended that with the no-new-tax constraint imposed by Pawlenty, they had little choice but to rejigger the current distribution of tax benefits.

"This is serious stuff to Minnesotans who are getting taxed out of their homes," Lenczewski said. "In tough times in a deficit, you've got to pick. We're choosing to take all the current property tax benefit and restructure it based on ability to pay."

Revenue Commissioner Ward Einess warned that if the bill becomes law, Minnesota would become one of only a few states to disallow property taxes as a deduction.

"This would be a sea change on income taxes," he said.

The bill hit another sore spot with Pawlenty because it would phase out JOBZ, his signature economic development program. The Job Opportunity Building Zones program has come under criticism from the legislative auditor as costly and ineffective. The bill blocks new participants after June.

Republicans mounted a spirited defense of the program, saying the state needs to do what it can to spur job development, but DFLers defeated amendments to preserve the program.

"JOBZ is a failure and doesn't work," said Rep. Ryan Winkler, DFL-Golden Valley. "This program doesn't work and can't work because all it does is move jobs around."

The bill also would increase aid to local governments, counties and townships by $73 million in 2009.

The approved bill will run headlong into a vastly different Senate tax bill, which focuses its tax relief on local government aid, increasing it by $115 million.