Taxes, Spending Climb After Minn. Shutdown

Published September 1, 2005

The 2005 legislative session proved to be brutal for Minnesota taxpayers and Republican lawmakers.

Senate Democrats, smarting from policy losses over the past few years and emboldened by gains in the 2004 elections, pushed back hard and won major tax and spending increases after a partial government shutdown and the temporary layoffs of thousands of state workers.

“Our issues are on the side of the people. God and the stars are on our side on this one. The folks are on our side and that’s why we are willing to negotiate and not willing to capitulate,” Senate Majority Leader Dean Johnson (D-Willmar) told Minnesota Public Radio in June.

The Democrats had taken over the State Senate in 2002 and made big gains in the House, cutting the Republican majority from 81-53 in 2002 to 68-67 in 2004.

Big Tax Hikes Proposed

This year’s legislative session began with the state running a budget deficit of about $400 million a year. But Democrats pushed for a $1.4 billion tax increase, including a proposal that would have given Minnesota the top income tax rate in the nation at 10.65 percent.

The income tax proposal didn’t pass, but the session ended with tax and fee increases of $560 million and spending increases of about $2 billion, bringing total spending to $30.1 billion for the fiscal 2006-7 budget.

From the beginning Republicans appeared to be on the defensive. Pulling back from his earlier insistence that “Minnesota has a spending problem, not a revenue problem,” Republican Gov. Tim Pawlenty proposed a state-run casino in partnership with some of the poorer Indian tribes to raise hundreds of millions of dollars of revenue.

Governor’s Idea Flopped

Pawlenty’s efforts fell flat, largely because neither conservative Republicans nor liberal Democrats were interested in expanding gambling. The Republican Party platform explicitly rejects state-run gambling, and Pawlenty himself had strongly opposed any expansion until a conversion on the issue late last year. Pawlenty’s gambit left Republicans split and Democrats united.

Democrats made gains early in the legislative session, successfully passing a $945 million bonding bill, a dollar-an-hour increase in the minimum wage (to $6.15), a 50 percent increase in the gas tax to 30 cents a gallon (later vetoed by the governor), and in partnership with the governor an increase in the mandated ethanol content of gasoline to 20 percent.

In the third week of May–nearing the constitutionally mandated deadline for passing a budget–the legislature remained in deadlock. Republicans refused to budge on raising taxes, and Democrats refused to reduce their spending goals.

‘Health Fee’ Stunned Lawmakers

In a move to break the deadlock, Pawlenty surprised everyone by proposing a 75 cents a pack “health impact fee” on cigarettes, just two days before the deadline for ending the legislative session. Insisting his fee was not a tax, Pawlenty suggested using the increased revenue to fund new education and health care spending called for by the Democrats.

Pawlenty hoped that increasing expected revenue by $400 million and earmarking the proceeds for education would be seen as “bold leadership” that would break the impasse.

His concession had the opposite effect.

The cigarette tax increase was accepted and Democrats dug in, hoping Pawlenty’s move was simply the first crack in the dam holding back additional tax increases. Republicans divided even further, with about one-third of the caucus having vowed not to raise taxes and unwilling to go along with the governor.

Government Was Shut Down

Chaos followed. Six weeks of special session without resolution led to a first-ever partial government shutdown. Nine thousand government employees were laid off, a special master was appointed by the courts to run state government, and the political gridlock spurred a backlash expected to influence the 2006 elections, although no one knows how that will play out. Most legislators wouldn’t appear at Fourth of July events for fear of being lambasted.

After little more than a week the showdown ended, with Pawlenty having given ground on revenue increases and the Democrat Senate having settled for about half the new spending it had proposed.

State Democrats see the session as largely a success, with significant policy and political goals having been met, while Republicans are squabbling among themselves over why things went so wrong.

Policy disputes during the session led to the resignation of a long-time Republican National Committeeman, Jack Meeks, and the ouster of six-year Republican Party Chairman Ron Eibensteiner.

Bill Cooper, a former state party chair, endorsed Ron Carey, Eibensteiner’s opponent, for the chairmanship of the Minnesota Republican Party. Cooper took a direct shot at the party’s current direction in a June 11 interview posted on the Minnesota Public Radio Web site. “We don’t need any more taxes. Income taxes are rising at over 15 percent in Minnesota. What’s happened to your property tax assessments? Mine went up 16 and a half percent. We don’t need any more taxes. We don’t need any more fees.”

Small Businesses Hit Hard

The largest unknown is how Republican constituencies will react to the session. Small businesses, in particular, took a real hit, with increases in the minimum wage, the ethanol mandate (which will require convenience stores to make new capital expenditures because ethanol is so corrosive to equipment), and the tobacco tax hike.

Buzz Anderson, president of the Minnesota Retailers Association, summed up the session as follows: “This year’s legislative session was one of the most difficult ever experienced by the retail community. There appears to be less and less understanding of the role of free enterprise in our economic system.”

Pawlenty came out of the session battered and bruised. His once-soaring approval rating sank to 43 percent in the SurveyUSA poll released in July.

David Strom ([email protected]) is president of the Taxpayers League of Minnesota.