Gov. Tim Pawlenty delivered a one-two punch of deep spending cuts and dramatic business tax reductions in a State of the State address Thursday that sets the stage for a clash of wills with a heavily DFL-controlled Legislature.

How that will play out isn't known, but what's clear is that average Minnesotans can expect their government -- and the services it provides -- to shrink in the coming months.

Pawlenty did propose a modest increase to K-12 schools that abide by his teacher merit pay plan known as Q Comp and meet other performance criteria and said that he would preserve children's health insurance, but that legislators should brace for heavy cuts in other areas.

"Our challenge this year is not just to close the huge budget deficit," Pawlenty said to a joint session of the state House and Senate. "We also have to strategically position Minnesota to thrive in a very different world."

Among what is sure to be a controversial set of proposals: Pawlenty wants to freeze all state government wages for two years and extend the freeze to any government entity that accepts state money. That could include local and county government workers and thousands of teachers and professors.

DFLers appeared taken aback by Pawlenty's apparent rejection of their bid for a mix of spending cuts and revenue increases as the recipe for tackling a massive deficit of nearly $5 billion.

"I kept thinking, is there a surplus I didn't know about?" said Assistant Senate Majority Leader Tarryl Clark, DFL-St. Cloud. "Tax cuts cost money and we don't have any. I think the people of Minnesota are more aware of the crisis we face than the governor."

House Speaker Margaret Anderson Kelliher, DFL-Minneapolis, said that a quick calculation of the impact of the proposed business tax cuts and education increases, when fully phased in, could add as much as $800 million to $1 billion to the deficit.

"We were looking toward the governor to make concrete solutions to how we are going to solve this very mammoth problem together," Kelliher said. "The governor's answer was to actually make the problem worse."

Republican legislative leaders called Pawlenty's speech "uplifting" and "even courageous."

"If you tax job providers, you have fewer jobs," said House Minority Leader Marty Seifert, R-Marshall. Pinning hopes on the awaited federal recovery package, as DFLers did earlier in the week, he said, "is a little like waiting for the Publisher's Clearinghouse guy to show up and knock on your door."

Art Rolnick, vice president of the Federal Reserve Bank of Minneapolis and an economist frequently lauded by DFLers, said that Pawlenty's tax approach would rile some but should be considered. "Keeping business taxes low encourages business growth," Rolnick said. "That's pretty well proven. The idea that it's taxing the rich is just wrong." But others say the toll on workers from overreliance on spending cuts will be too high.

Eliot Seide, executive director of the American Federation of State, County and Municipal Employees, Council 5, which represents 19,000 state employees, said cuts that resulted in layoffs could have a broad impact, particularly in small-town Minnesota.

Pawlenty said that scaling down the state's corporate rate from 9.8 percent to 4.8 percent over the next six years "will take us from having one of the worst business tax rates in the country to having one of the best."

House Taxes Chair Ann Lenczewski, DFL-Bloomington, and Senate Taxes Chair Tom Bakk, DFL-Cook said they would look at corporate tax reductions, but said Pawlenty must offer a way to compensate for the lost revenue. "I don't accept that we're going to just grow our way out of this," Bakk said. "We can't count on that."

Diplomatic tone

Pawlenty's tone was more conciliatory than in the past -- last year he waved a veto pen and dared DFLers to make him use it. This time, facing a DFL-controlled Legislature that is just three votes shy of being veto-proof, Pawlenty cloaked his tough policies in a softer voice.

Facing a divided House chamber with DFL representatives and senators on one side and Republicans on the other, Pawlenty borrowed a line from President-elect Barack Obama, saying that "Today, we're not Democrats. We're not Republicans. We're Minnesotans. We're all here because we love and care about Minnesota."

At one point, he implored legislators to think of average citizens before pitching tax increases.

"Please don't add to their burden by increasing their bill from government," he said. "Please don't raise their taxes."

DFLers maintain that Pawlenty's policies have sheltered the state's richest citizens at the expense of the rest of the state and protected corporations while the state shed jobs.

Pawlenty even tried a little humor, opening his speech with a reference to former Gov. John A. Johnson, a Democrat who a century ago returned from a brush with national politics to his home state and dropped dead a few months later.

"You may not be so lucky," Pawlenty told legislators. "My health is good."

That brought a laugh, but the mood quickly turned when DFLers heard what was next.

In addition to significant health-care spending cuts and a state wage freeze, Pawlenty seeks a tuition cap on colleges and universities. He wants the state's 87 counties to give up one of their major functions -- providing human services -- and instead let such services be provided by 15 "regional enterprises" spread across the state. Similarly, the state's 490 school districts and charter schools should be required to do bulk purchasing for food, textbooks and supplies.

Said Pawlenty: "The old ways aren't going to cut it anymore."

Patricia Lopez • 651 -222-1288 Mark Brunswick • 651-222-1636