Editorial: 'Sin' taxes could be key to budget deal

Gov. Tim Pawlenty may have been stripped of his unallotment power last week, but his veto power is intact. And so, it appears, is the Minnesota House GOP minority's willingness to act in unison to block override attempts.

That's still the governing reality at the State Capitol. It's why an air of futility surrounded Monday's move by the Legislature's DFL majorities to temporarily increase the income taxes paid by the top-earning 125,000 filers.

That proposal won't fly. Pawlenty has vetoed a similar tax change on at least four previous occasions, and no GOP legislator has shown any inclination to disagree with him. Monday's bill had not yet cleared one chamber when Pawlenty vowed to deep-six this version, too.

The Republican governor has held fast to his opposition to a high-end income tax hike despite a widening gap between the effective state-plus-local tax rate paid by most Minnesotans (about 12 percent) and top earners (about 9 percent). GOP legislators labeled Monday's DFL tax proposal a "job killer" and, in the best metaphor of the session to date, "four-day-old reheated hot dish."

DFLers were well aware that opposition to their proposal is so strong that it runs into their own ranks. (Twelve DFL senators voted against it on Monday.) But they also know well that House Speaker Margaret Anderson Kelliher, the DFL endorsee for governor, is in a tough Aug. 10 primary contest with former U.S. Sen. Mark Dayton, a candidate who has made "tax the rich" his mantra. Monday's agenda seemed more relevant to electioneering than budget-setting.

This page shares the DFL view that, with a $3 billion gap yet to close in a half-spent $31 billion biennial state budget, a modest tax increase is in order this year. Legislators and the governor have already imposed $2 billion in spending cuts in 2009 and 2010, and DFLers said Monday they are willing to follow Pawlenty's lead on spending cuts and payment delays to schools for another $2.5 billion.

In that context, a tax increase in the $300 million range is not unreasonable, especially when that amount can avert cuts that deprive the poorest Minnesotans of a decent life. One such cut -- elimination of food assistance to low-income people whose chronic illnesses require special diets -- landed Pawlenty's unallotment in court. Spending cuts of that sort discredit this state.

We also agree that wealthy Minnesotans ought to pay their fair share of taxes -- provided those taxes do not cripple the state's business competitiveness. The mobility of capital in a global economy makes state tax competitiveness more important today than ever before. And thousands of small businesses pay taxes via their owners' individual income tax returns.

For that reason, we prefer expanding the sales tax to clothing, services and other exempt items (offset by a tax credit for low-income consumers), rather than raising income taxes only on upper-income Minnesotans. We also believe that among the $11 billion per year "spent" in income tax credits, exemptions and deductions are some that have outlived their usefulness and should end.

Of course, those ideas would also find a frosty reception in the governor's office. Pawlenty's "no new taxes" rigidity stands in the way of needed tax reform. Adjustments to the state tax code for the sake of a better business climate are overdue -- but, barring a major change of gubernatorial course, they are not in the offing in the next few days.

That leaves one plausible revenue-raising option for bipartisan exploration this week -- "sin" taxes.

Under the guise of a "health impact fee," Pawlenty agreed to raising the price of cigarettes 75 cents in 2005. He ought to be open to another hike. As Independence Party gubernatorial candidate Tom Horner noted last week: "There is no good public policy that supports cheap cigarettes." Adding $1 per pack to the state's "fee" would raise $91 million in the first year of the tax's life, according to a 2009 analysis by the American Cancer Society.

An increase in state taxes on alcoholic beverages also ought to be under consideration this week. Minnesota's alcohol taxes have not been increased since 1987 and, in the case of wine, are now half as much per gallon as the national median. The twice-vetoed 2009 tax bill included an alcohol tax increase of about $120 million per year. While that would nearly double the state's booze tax, it would not come close to offsetting the more than $4 billion estimated annual economic cost to this state of alcohol abuse. As we said one year ago this week, an "alcohol impact fee" ought to be easy to swallow.