New tax plan up for discussion at the Capitol

Rep. Ann Lenczewski, DFL-Bloomington, is once again trying to remove several individual and business breaks from the state's tax code.

Under her plan, Lenczewski would eliminate tax breaks for individuals including deductions for mortgage interest, K-12 school expenses and health insurance credits.

The plan would also erase business tax breaks for research and development, biotech zones and JOBZ, Gov. Pawlenty's rural economic development initiative. Lenczewski said the state and federal government eliminated similar tax breaks in the 1980s.

"But they've crept back in. It's time to sweep the barn," she said. "We're going to do what Reagan did. We're going to do what Governor Perpich did. We just can't afford this anymore."

Lenczewski said the state's projected budget deficit of $4.6 billion should force the Legislature to do things differently. In exchange for tax increases in some areas, she said her plan provides some basic tax breaks.

The income tax rate for couples making less than $132,000 a year would be cut slightly; small and large businesses would get a break; and there would be some new tax credits for mortgage interest, charitable contributions and family expenses.

Lenczewski said a recent study by the Minnesota Department of Revenue is proof that the tax system needs an overhaul. The study found lower and middle-income households are paying a higher percentage of their income on taxes than the highest income households do.

Lenczewski compared existing tax breaks to people siphoning off water before everyone else gets a drink.

"More and more people are starting to understand that tax expenditures are hidden spending that has those people up at the top of the waterfall, and makes it harder for the five million Minnesotans standing around the lake to fund higher ed and everything else, because before we even begin we're removing part of our revenue stream," she said.

Lenczewski's plan would not bring any more money into the state's treasury, but she hinted that House Democrats will propose higher taxes when they release their budget proposal later this week.

House Republicans say they're concerned about the looming tax hike, but also say Lenczewski's plan would harm the state's business climate. Rep. Kurt Zellars, R-Maple Grove, said eliminating certain business tax breaks will make it difficult for businesses to plan over the long term.

"If in the past, you're basing some of your business model on research and development tax credits, that means you won't have the next two or three products that you can spend on research and they'll go away. That could at least flatline or stagnate your company," said Zellars.

Revenue Commissioner Ward Einess said it's unlikely that Gov. Pawlenty will embrace Lenczewski's proposal.

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