Tax debate already beginning at Capitol

The chairman of the Senate taxes committee is bracing for a big budget deficit and a tough 2009 session.

And if recent estimates of a possible $4 billion shortfall hold true, Sen. Tom Bakk, DFL-Cook said many special interest groups will be disappointed.

"There's going to be a lot of cuts in the state budget everywhere," he said. "There's no way we can tax our way out of this problem. The numbers are too big."

But Bakk said changes are needed to help stabilize the state tax system and prevent the wide, annual swings in revenue. Bakk said some stability could come from changes in the state's 6.5 percent sales tax.

He said he wants to dust off a proposal made by former Gov. Jesse Ventura to lower the sales tax rate by broadening the tax to include products and services that are currently exempt.

"You know, there I guess it just depends on what you broaden it to," he said. "I mean the more things you broaden it to, the more you can lower the rate down. Some people think you can get the sales tax rate as low as 5 percent if you broaden it to enough things."

Bakk said he's reluctant to make changes in the sales tax because it would have a bigger impact on low income people. That's why he also wants to consider income tax changes, including a possible increase in the rate paid by the highest earning Minnesotans.

"And so there's always an argument around the Capitol and a discussion among tax chairs, well gee, to really be fair, shouldn't everybody pay roughly the same kind of percentage of their income in taxes to make their contribution to the community?" he said. "So, we tend to I think favor looking at the income tax more because it's more progressive, most people would argue more fair."

But an income tax increase, even in the face of a huge deficit, isn't likely to get past Gov. Tim Pawlenty. The Republican governor has butted heads with Democrats over tax increases before, and he appears ready to do it again.

During a recent edition of his weekly radio show, Pawlenty said an income tax increase would do little to help balance the budget.

"Let's say you took the top income tax rate from 7.85 percent, which is the current rate, to 8.85 percent. That would net you $300 million," he said. "So you couldn't even begin to solve a multi-billion deficit with that kind of approach."

Pawlenty said an increase in the state's corporate tax rate would offer a similarly inadequate payoff for budget balancing.

He's been advocating for a cut in the current 9.8 percent corporate tax as a way to improve Minnesota's business climate. A tax reform commission has been looking into the issue too, and will make its recommendations to the governor early next year.

Rep. Ann Lenczewski, DFL-Bloomington, chair of the House tax committee, is also pushing for a lower corporate tax rate. Lenczewski's plan, which she failed to pass last session, would lower the corporate tax rate to 8.8 percent, by eliminating every existing tax break and incentive directed to businesses.

"Throw them all out," she said. "And instead of having 10 percent of Minnesota companies getting some sweetheart deal and 90 percent of Minnesota companies subsidizing you all, we're going to take away your deal and give everybody a reduced corporate tax."

Lenczewski said she thinks she's gaining bipartisan support for her proposal, and she hope Gov. Pawlenty's commission includes a similar approach in its final report.

House and Senate tax committees will begin discussing reform proposals when the 2009 Legislature convenes Jan. 6.

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