Mustering courage and bold reform

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The wear of this session can be seen on the faces of many representatives. With the April 20 release of the House omnibus tax bill, it might have been slightly more prevalent for Rep. Ann Lenczewski (DFL-Bloomington).

“The choices are not good,” she said of fixing the state’s projected $4.6 billion biennial 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.”

In the bill she sponsors, HF2323, cigarette taxes would go up by 54 cents a pack, the liquor tax would rise for the first time since 1987 and top income-earners would be subject to a new 9 percent income tax rate under the $1.5 billion tax bill.

The bill also would eliminate $1.6 billion in tax breaks by removing many deductions, closing corporate loopholes and converting the state’s mortgage interest deduction into a credit so that all taxpayers qualify for an equal percentage of tax benefit.

“We’ve got a deficit, so let’s have some courage around here and do some bold reform,” said Lenczewski, chairwoman of the House Taxes Committee.

She said the bill is modeled after President Reagan’s overhaul of the federal tax code in the 1980s and similar to what then-Gov. Al Quie allowed to become law. During that time, several tax breaks were thrown out and massive reform took place.

“I’ll tell you, sometimes you got to walk the plank, don’t you?” said Rep. Tom Rukavina (DFL-Virginia) after casting the final vote to move the bill out of the House Taxes Committee 16-14, adding that he isn’t sure if he’ll vote for it again.

During the April 21 bill discussion, Rukavina unsuccessfully tried to attach a temporary across the board 2.5 percent income surtax to the bill, replacing the tax increases to liquor and tobacco.

“We know who smokes cigarettes. It’s the poorest of the poor,” he said. “There are some very good parts of this bill, but there are parts that have troubled me. I have been tossing and turning for the last two nights. But I realize that we have to have a tax bill and I don’t think anybody on this committee can forget that from the first day of this committee I’ve been saying that we’ve gotta raise revenue.”

He added that, like alcohol, income taxes haven’t been raised in more than 20 years. “The top rate used to be 14 percent,” he said. “Madam Chair, you’re just raising it to 9 (percent) and you’d think you were the Wicked Witch of Minnesota for doing it.”

Nearly 20 amendments were presented during the four-hour markup of the bill April 21. Several were adopted before the bill was passed and sent to the House Ways and Means Committee, which approved the measure 12-9 the next day. It was scheduled to be heard on the House floor sometime between April 24 and 27. The Senate omnibus tax bill, SF2074, sponsored by Sen. Tom Bakk , (DFL-Cook), was scheduled to be heard by the Senate April 24.

Four-year budget balancing

Earlier this session, Gov. Tim Pawlenty signed into law a four-year balanced budget requirement, which states that not only does the state’s budget have to be in balance for the 2010-11 biennium, but also for the 2012-13 biennium.

“The balanced budget amendment is something Minnesota has never considered before,” Lenczewski said, adding that the state used to balance budgets for one year, then it was changed to two years and now it’s four years. “I think everyone is sort of struggling with how we figure that out.”

Questions were raised by Rep. Laura Brod (R-New Prague) during hearings on the tax omnibus bill regarding the 2012-13 target being short.

“I don’t think it’s appropriate for us to leave $1.1 billion out there, in terms of our responsibility, without telling Minnesotans how we’re going to account for it,” she said. “This piece is a big deal.”

During the April 22 floor session, Brod opposed the adoption of the tax committee report stating the same reason: The bill is out of balance. Her motion to reject the report was defeated 77-54.

Questioned again April 22 during a House Ways and Means Committee hearing on her bill, Lenczewski said the shortfall would be dealt with in the future as she is waiting to see how the governor will approach his four-year target. The budget-balancing law was passed after Pawlenty had released his proposed budget in January.

“Can you tell me what’s causing this to happen if you’re increasing taxes $1.5 billion?” asked Rep. Mary Liz Holberg (R-Lakeville). “Are you expecting revenues to go down in ‘12-’13? I’m trying to figure out if revenues are going down in the out years or if spending in the tax bill is going up. What’s happening that you’re short a billion dollars?”

Lenczewski said revenues are not going down in this tax bill, but the target for the 2012-13 biennium goes up. Based on the current bill, there is a shortfall for that biennium.

“Between now and that biennium we’re going to have five (fiscal) forecasts so things are going to change a lot,” she said. “But the way I’ll approach it is that I’ll reach the target I am given. I would imagine the House majority will continue to do what it’s doing now, which is a blend of cuts and revenue.”

She added that one change from the current biennium is the use of one-time money that would need to be replaced, but that’s not in the tax area, it’s in the overall budget.

Local control

As a way to deal with cuts to various county and city aids, Rep. Paul Marquart (DFL-Dilworth), House Property and Local Sales Tax Division chairman, proposed in his division report, which is included in the omnibus tax bill, to give counties the option to impose a half-cent local option sales tax to offset cuts to aids.

The sales tax option would help save some anticipated state cuts to local government aid, which is often used to pay for essential services, like police.

The half-cent option could be adopted by a majority vote of a county’s commissioners. The tax could be overturned in a countywide referendum that would take place if 10 percent of the county’s registered voters or 500 people, whichever is greater, called for one.

Currently there are 23 Minnesota cities with a local option sales tax. Any cities in counties that pass the half-cent increase would lose their local option sales tax, Marquart said. Counties would then be obligated to fund projects that had been funded through the city tax. Only three cities could be exempted from the elimination: Minneapolis, St. Paul and Duluth.

But, Marquart said, counties would have a stable and growing revenue source, with more than half the money going to property tax relief.

Marquart said this provision was crafted to be similar to one the governor has signed in the past. Lenczewski said the local option sales tax is reminiscent of the one Pawlenty signed, which allowed Hennepin County to raise its sales tax to help fund construction of Target Field for the Minnesota Twins.

Some members said that state voters just approved a three-eighths of 1 percent sales tax increase for the arts and the outdoors that takes effect this summer, and if local option sales taxes are imposed, it would be in addition to the arts and outdoors tax.

Marquart said the big concern was the great inequities local option sales taxes cause. “If everyone has them, this minimizes the inequities.”

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