Surprise, surprise: And then there was a tax bill…

Well, that was fast.

After days spent languishing in conference over intractable differences between the House and Senate omnibus tax bills, legislative DFLers made a surprising and unconventional move Thursday. And before the day was done, they had formed a new taxes conference committee that proceeded in short order to pass a package of tax hikes worth roughly $1 billion.

Those increases would come from three sources: a new 9 percent income tax tier for households making over $250,000 a year–the lone major revenue source that House and Senate omnibus bills agreed on–coupled with higher alcohol taxes and a levy on the income credit card companies generate by charging interest rates in excess of 15 percent. The new income tax bracket would generate about half of the $1 billion in revenue, the other two provisions about one-quarter apiece.

And, in the bill’s most controversial move, it then appropriates those new revenues to pay for $586 million in K-12 education costs and $402 million in health care costs ($288 million for nursing homes and other long-term care provisions, $114 million for hospitals).

With the new tax bill comes a new political stratagem: DFLers are touting the $1 billion in new revenue as a direct alternative to the nearly $1 billion in new revenue in Gov. Tim Pawlenty’s budget that would come from selling appropriation bonds based on the state’s continuing tobacco settlement revenues. The Pawlenty bond plan, which is opposed by the DFL and viewed dimly by many Republicans in both chambers, would cost the state $1.6 billion in future revenues over the course of 20 years.

Afterward Rep. Paul Marquart (DFL-Dilworth) termed the new conference bill a "game-changer." Here’s a rundown of some of the ways it alters the end-of-session landscape:

• It circumvents the chief stumbling blocks to progress in the first taxes conference committee. Tax co-chairs Rep. Ann Lenczewski (DFL-Bloomington) and Sen. Tom Bakk (DFL-Cook) had spent a week disagreeing over tax breaks for business and other exemptions. The Senate bill made liberal use of such tax breaks; the House plan aimed to cut back exemptions to the tune of $500 million, and Lenczewski held fast in her opposition to any new tax breaks. In addition, the new approach compromises on the sin tax hikes that were a key part of the House plan but were generally opposed by Bakk. The alcohol taxes proposed by the House are in, the cigarette taxes are out.
• It puts the governor’s education promises on the spot. Pawlenty has pledged from the start of the session to hold the K-12 budget harmless. By tying the tax hikes to appropriations contained in the same bill, DFLers are trying to make Pawlenty an offer he can’t refuse: Embrace these new revenues or make permanent education spending cuts to pay for his refusal.
• It tries to set the stage for an override by attacking the Pawlenty budget’s weakest link. Nobody likes the governor’s appropriation bond proposal–even, apparently, the governor, who has said publicly that it isn’t an "optimal" solution. By casting a smaller-than-expected package of tax hikes as a dollar-for-dollar alternative to the unpopular bond plan, DFLers are angling to change the override dynamics in the House. They’re looking to coax conservative, blue-dog DFLers and a handful of Republicans into an anti-tobacco bond coalition that could override a Pawlenty veto. Whether this will work is doubtful–following the purge of the so-called "Override Six" Republicans who flouted the governor’s transportation bill veto last year (only two of whom were re-elected), the House GOP has shown no signs of falling out of lockstep with Pawlenty this year–but it’s clearly the Democrats’ objective.
• The Senate will have to embrace shifts. Both Pawlenty and the House DFL made education cost shifts a key part of their budget plans ($1.3 billion and $1.7 billion, respectively). The Senate did not, which is the main reason Bakk’s initial tax increase target was a hefty $2.2 billion. Advancing a strategic $1 billion package means that even if there’s more new revenue in the eventual report of the first taxes conference committee, the Senate will in all probability still need a shift to balance its approach.
• So what about the remainder of the House and Senate’s new revenue targets? It’s hard to imagine that DFL legislative leadership will propose enlarging the $1.7 billion cost shift pitched by the House. And even with that shift, the House DFL still needed $1.5 billion in new tax hike proposals to balance its budget targets. The proposal passed last night leaves DFLers about $500 million short of that mark. Will that $500 million show up in additional revenue-generators the final package from Taxes Conference Committee I? Or will the Legislature cut their way to making up that gap? One legislative staffer tells PIM this morning that it’s likely to be a combination of additional cuts and additional tax increases.

Yesterday’s floor introduction of the second tax bill caused eruptions from angry Republicans in both chambers. In the Senate, GOP members charged that the move violated both the Senate’s own rules (by splitting an omnibus bill into more than one piece) and the Minnesota constitution (by treating more than a single subject in one bill). In the House, some GOP members alleged that the appropriations article of the bill–which were blank at the time it was debated on the floor–amounted to an effort to force a schools shutdown later this year if the governor did not sign the tax increases. Rep. Tom Emmer (R-Delano) also claimed that the appropriations measure represented a usurping of the body’s budget-setting authority by Speaker Margaret Anderson Kelliher (DFL-Minneapolis).

In the Senate, Majority Leader Larry Pogemiller (DFL-Minneapolis) defended the bill on two fronts: first, by claiming that it was a new piece of legislation, not a splitting of the main taxes omnibus (though many of the Department of Revenue administrative provisions that formed the bill’s foundation were in the Senate’s omnibus tax bill); and second, by calling it a means of facilitating compromise between the Legislature and the governor: "The suggestion was, why don’t we create the possibility of another
conference committee where we could put some combination of tax
provisions and expenditure provisions in one place that might break the
logjam around here a little?"

Bakk followed by hammering the appropriation bond theme: "Everybody in this room knows that the governor made the spending cuts he thought he could make, and then he went to a school aid payment shift, and then he borrowed money out of future budgets by creating something he calls an appropriation bond–really a loan… I feel very strongly that we should not borrow money to resolve this budget deficit. My hope is that this vehicle, when a conference committee gets appointed, we can find some other option to borrowing money–some other way to raise that $986 million."

The roster of conferees on the new bill was similar to that of the first taxes conference committee. On the Senate side, lone committee Republican Debbie Johnson (Ham Lake) was replaced by DFL Sen. Ann Rest (New Hope). The House made three substitutions: DFLers Erin Murphy (St. Paul) and Mindy Greiling (Roseville) and Republican Keith Downey (Edina) replaced DFLers Lyle Koenen (Clara City) and Diane Loeffler (Minneapolis) and Republican Minority Leader Marty Seifert (Marshall). Downey cast the only no vote in the bill’s 9-1 passage.