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Budget fix rests on tobacco taxes

Senate turns to cigarettes to balance budget

By Ashley H. Grant

Associated Press

ST. PAUL -- The DFL-controlled Senate scrapped a plan Wednesday to raise income taxes in favor of a bigger hike in tobacco taxes to help close the remaining budget deficit and replenish reserves.

Senate Tax Chairman Larry Pogemiller said temporarily increasing the income tax remained his first choice. But, he said, administration officials convinced him the plan eventually would leave a hole in the budget when rates dropped in 2005.

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Pogemiller, DFL-Minneapolis, had proposed the income tax boost on Friday, along with a 29-cent-per-pack increase in the cigarette tax beginning May 1.

The plan considered by the Senate Tax Committee on Wednesday would raise the cigarette tax by 30 cents per pack in May and another 30 cents Jan. 1. Taxes on other tobacco products also would rise.

Minnesota's current cigarette tax is 48 cents a pack, which puts the state 20th among all states.

The proposed increase tops Gov. Jesse Ventura's 29-cent recommendation earlier this year, a pretty steep hike, said Revenue Commissioner Matt Smith.

But, he added, the move takes the Senate plan closer to something the governor could support.

House Republican leaders also said a cigarette tax increase would be more palatable than one on income taxes.

House Speaker Steve Sviggum noted that if the 1998 income tax levels were restored as originally suggested, the middle bracket would increase the most because it was cut the deepest during the last few years.

"You've got to identify the difference between bad and worse," said Sviggum, R-Kenyon. "They've chosen bad. ... There are no positive taxes."

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Even though House Republicans aren't likely to support a higher cigarette tax, Senate DFLers' willingness to move away from the income tax brings the two legislative bodies a step closer to fixing the remaining $440 million budget deficit, Sviggum said.

Matt Flory of the American Cancer Society said his organization was disappointed that House leaders opposed the cigarette tax boost.

The House has proposed using about $310 million of the state's tobacco settlement money, cutting another $100 million in spending and drawing down remaining reserve accounts to balance the remaining deficit.

Other provisions in the Senate's plan include reducing a homestead credit on homes more than $215,000 and allowing the statewide property tax rate on businesses to remain constant instead of dropping as the properties' market value goes up.

The additional money raised through the business tax would go toward a 2.5 percent inflationary budget increase for K-12 education for 2004-05.

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