With just one week left in the session, state legislators on Monday took a first step toward solving a budget deficit created when the state Supreme Court ruled against the unilateral cuts Gov. Tim Pawlenty made last year.
The DFL-controlled House and Senate voted to approve a DFL plan to erase the nearly $3 billion deficit through cuts, a school payment shift and an income tax increase for Minnesota's wealthiest residents.
The legislation now goes to Pawlenty, who has promised to veto it.
"The DFL tax increase plan would give Minnesota the fifth highest income tax rate in the country, would deter small businesses from growing jobs, and would lead to more unemployed Minnesotans," Pawlenty, a Republican, said in a written statement.
DFL legislative leaders said Pawlenty's cuts-only approach won't work to solve the state's long-term financial situation.
"Those that would like to boil this down to whether taxes would be increased or not are oversimplifying the problem and fiscal situation we're in right now," DFL House Majority Leader Tony Sertich said. "We have to look at a way to balance the budget in a fair and honest way into the future."
House Speaker Margaret Anderson Kelliher defended the plan, saying "more than meets the governor but does not compromise Minnesota's most important priorities," including children and schools and nursing home residents and their caregivers.
The Senate debated the DFL budget plan Monday afternoon, and it passed 34-33 with 12 DFLers joining Republicans to oppose it. The House voted 71-63 to approve the bill.
The state's $536 million budget deficit is now considered a nearly $3 billion deficit because of Supreme Court decision last week that struck down Pawlenty's unallotment of a nutrition program for low-income Minnesotans. While the decision applies only to that program, Pawlenty's $2.7 billion in cuts through unallotment could also be challenged in court.
DFL lawmakers, who have long said Pawlenty's use of unallotment was illegal, are assuming they must now come up with nearly $3 billion to fill the potential budget hole for the current two-year budget that ends June 30, 2011.
Pawlenty has said the court's decision could create a serious cash flow problem, and he's asked legislators to ratify his unallotment cuts. DFL leaders have rejected that idea.
On Monday morning, DFL leaders held a news conference to announce their plan, which would generate about $435 million in new revenue as part of an overall budget plan that also includes more than $2.5 billion in spending cuts.
The fourth-tier income tax would include married filers earning $200,000 or more after deductions and exemptions. For single people, the higher tax would kick in when taxable income hits $113,100. The tax rate for those couples and individuals would rise from 7.85 percent to 9.15 percent only on income over the thresholds, and there's a provision for the rate to go back down if the state's budget forecast in February 2013 shows a surplus of $500 million or more.
The bill also recognizes the end of federal tax cuts enacted under former President George W. Bush a year early. DFL Senate Majority Leader Larry Pogemiller of Minneapolis said the blink off was included in an attempt to find common ground with the governor.
"This proposal, we think, is viable politically if the governor has a change of heart," Pogemiller said. "And we need to get it to him as quickly as possible so that we can find out if he agrees with that. If he doesn't agree with that, then we have to try to figure out something else."
DFL leaders said the taxes would generate enough revenue to pay back the money the state borrows from K-12 schools.
Republican legislative leaders said the income tax increase would hurt small businesses and kill jobs just as they start to recover from the recession.
"It will absolutely crush economic development," said House Minority Leader Kurt Zellers, R-Maple Grove.
Senate Minority Leader David Senjem, R-Rochester, said he was disappointed DFL leaders were trying something that would clearly fail.
"This is headed straight to veto land, and the quicker the better," Senjem said.
During a committee hearing Monday morning, other Republicans agreed.
"The veto is not going to get overridden. So, I'm glad we can get through this exercise quickly, then hopefully we can get to work to actually solving the budget deficit before we have to go home," said Rep. Paul Kohls, R-Victoria.
DFL Rep. Michael Paymar of St. Paul objected to the inflexibility shown by Republicans, saying it contributes to gridlock.
"We're in the midst of a crisis here. And when you just draw a line in the sand and say nothing is open for discussion, it's getting vetoed, you're wasting your time," Paymar said. "This is a charade, it's not the way you negotiate. That's what the public is frustrated with."
DFL leaders said they hope to meet with the governor later to resume budget negotiations. The state Constitution requires the Legislature to complete its work and adjourn by May 17.