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Senate bill would raise nearly all income taxes

Most Minnesotans' income taxes would rise under Senate Democrats' solution to the state budget deficit.

Combined with budget cuts and the use of federal economic stimulus money, the $2.2 billion tax increase would help fill what otherwise would be a $6.4 billion deficit in the two-year budget beginning July 1.

The tax plan unveiled Tuesday would raise taxes on all but 15.5 percent of Minnesota's 2 million taxpayers, Senate Tax Chairman Tom Bakk, DFL-Cook, said.

A married couple with two children and a $90,000 annual income would pay $400 a year more.

The plan, due for a committee vote today, would increase all brackets of income tax and add a new bracket for people making more than $250,000. Those Minnesotans would pay 9.25 percent of their salaries to the state, the third highest rate in the country.

Tuesday's announcement sets up a three-way battle with the House and Gov. Tim Pawlenty.

The House, like the Senate controlled by Democratic-Farmer-Laborites, on Monday began looking at a plan that keeps all income taxes the same except on couples who earn more than $300,000 or single taxpayers who earn about half of that. They would pay 9 percent of their income in taxes.

The House bill, which also would raise tobacco and alcohol taxes, passed out of the Taxes Committee 16-14, over objections of two northeastern Minnesota lawmakers.

"I don't know if I am going to vote for this bill again," Rep. Tom Rukavina, DFL-Virginia, said, adding that various tax increases are "nickeling and diming people."

But, he added, "sometime you have to walk the plank."

Rep. Dave Dill, DFL-Crane Lake, also complained about the bill.

They wanted to strip out alcohol and tobacco taxes, along with a sales tax the measure would impose on used all-terrain vehicles and snowmobiles. The bill also eliminates some tax breaks given to people buying homes.

When House and Senate tax leaders begin negotiating a compromise bill next week, they will offer markedly different bills.

Almost all of the Senate's tax increase is in the income tax. The House's $1.5 billion increase comes from a variety of taxes.

Once legislators figure out their final tax bill, they need to talk to Republican Pawlenty, who continues to say he will not accept a state tax increase.

However, Pawlenty does add revenue to his budget proposal by borrowing almost $1 billion.

"It is simply outrageous for Democrats to heap these massive tax increases onto all taxpayers when Minnesotans can least afford it," Pawlenty spokesman Brian McClung said. "Even by their standards, the Senate DFL tax bill is an extraordinary tax hike that will negatively impact everyone's pocketbooks and kill jobs."

McClung also was critical of the House plan, adding that "they really go over the cliff when they propose to increase taxes for child care or for donating an organ."

Republican senators said they cannot support the massive tax increases in the DFL's bill. Sen. Julianne Ortman, R-Chanhassen, said that during the current economic crisis, she favors Pawlenty's proposal to borrow nearly $1 billion.

If the government takes money away from taxpayers, they cannot spend it, she added, which would slow an economic recovery.

Bakk said the richest 80,000 taxpayers would pay 40 percent of the new taxes under his bill.

"Most people are going to be asked to participate in helping solve this serious budget problem," Bakk said. "There is no way to balance this budget without some angst on the part of our constituents."

The Senate plan raises the lowest income tax rate from 5.3 percent to 6 percent. Middle-income Minnesotans now pay 7.05 percent of their income in taxes, but under the Senate plan it would rise to 7.7 percent. The former upper bracket taxpayers' rates rise from 7.85 percent to 8.5 percent.

After deductions are figured in, Sen. Keith Langseth said, Minnesotans average paying 6 percent of their wages in state income taxes. It used to be 10.5 percent, so Minnesotans' tax bill are not too large, the Glyndon Democrat said, backing the higher taxes.

"You have to figure out what this state needs in the way of services and have to fund it," Langseth said.

The Senate's proposed tax increases would run through 2013.

The bill also eliminates truth in taxation hearings that local governments now are required to hold, giving the public a chance to comment on budget decisions.