Senate tax bill goes down to rare defeat

ST. PAUL - Rural senators who fear new taxes would hurt businesses in their districts defeated the Democrats' tax bill Wednesday.

It was the first time a Senate tax bill has been defeated in the memory of even longtime senators.

The bill would have lifted a cap on statewide business property taxes, increasing by $44 million what they pay next year and more than $280 million in 2008 and 2009.

It is back to the drawing board for Senate tax policy writers in an attempt to find something a majority of the 67 senators can embrace.

"There will be something, and hopefully it will be a lot more moderate," said Sen. Keith Langseth, DFL-Glyndon.

Two Twins Cities Democrats joined four rural DFLers - Langseth, Dallas Sams of Staples, Tarryl Clark of St. Cloud and Dan Sparks of Austin - and all 29 Republicans in defeating the proposal.

The 35-32 vote represented a rare defeat for Democrats who control the Senate.

"Usually what we do is talk it out (in private) and get the votes," Langseth said.

Langseth, one of the Senate's leading fiscal experts, said Senate Tax Chairman Larry Pogemiller ignored warnings from him and other rural senators in a DFL meeting before the full Senate debated the bill. Langseth and Sams said they urged Pogemiller to change the bill before it reached the full Senate or it would be defeated.

"I said: 'Larry, if that bill goes down, it is not going to look good,' " Langseth said.

Pogemiller apparently counted on some Republican votes, but all GOP speeches in the three-hour debate strongly opposed the plan.

Sams said there are ways to increase revenue, but not at the expense of small businesses that already are struggling.

With about $400 million available, there is not a need to greatly increase taxes, Langseth said. "It went too far."

The defeat clouds whether legislators can make good on their pre-session promise of property tax relief.

Pogemiller said his bill would have sent nearly $400 million to cities, counties and schools. That would lead to lower property taxes by reducing local government reliance on property taxes, he said.

"That's what this bill is about - property tax relief, property tax relief, property tax relief," the Minneapolis Democrat said.

Pogemiller took a far different route than House Republican leaders want. They propose mailing rebate checks worth 10 percent of each homeowner's property tax bill, for an average of $205.

Pogemiller said a 2001 property tax change was supposed to help homeowners, but the Legislature never provided enough financial backing. Since 2001, homeowners' property taxes have risen 40 percent statewide, he said.

"Don't you think a 40 percent tax increase on property tax increases is too much?" he asked.

Gov. Tim Pawlenty says property taxes are controlled by cities, counties and schools. However, Pogemiller said the Republican governor "is simply not being straightforward" because cuts in state payments to those governments forced property taxes to rise.

The defeated bill would have:

- Increased Local Government Aid to cities $78 million.

- Boosted public school funding $60 million.

- Sent $60 million to counties to offset federal budget cuts.

- Raised foreign operating corporation taxes paid by some businesses $160 million next year and $245 million in 2008-09.

Sen. Bill Belanger, R-Bloomington, told fellow senators the bill would have raised taxes $1.12 billion over the next few years.

The bill's defeat leaves in question when the Senate will debate its finance bill, which spends $204 million on programs across state government.

Senate Finance Chairman Dick Cohen, DFL-St. Paul, said without revenues contained in the tax bill, his finance measure cannot be debated today as planned.

(Don Davis covers the Minnesota Legislature for Forum Communications Co.)