• Minnesota Legislative Update: 2009 Session Preview
  • January 14, 2009 | Authors: Richard A. Forschler; Kathryn S. Hahne; Robert C. Hentges; John H. Herman; Nancy B. Hylden
  • Law Firm: Faegre & Benson LLP - Minneapolis Office
  • Fasten your seat belts. The 2009 session of the Minnesota Legislature convenes January 6—and it's going to be a very bumpy ride.

    Budget Decisions Will Dominate Session

    The November budget forecast released today confirms the state is facing a significant and possibly historic shortfall. A shortfall of $4.8 billion is projected for the 2010–2011 biennium in addition to a $426 million deficit before the 2008–2009 biennium ends next June 30. Given these conditions, the state economic picture facing Gov. Tim Pawlenty and the Legislature more closely resembles the one encountered by Gov. Al Quie and legislators in the early 1980s than anything experienced since.

    Balancing the projected $35.7 billion 2010–2011 budget as well as the current budget—as required under the state constitution—will call for a variety of spending reductions, revenue increases and accounting shifts. State agencies, which will take the brunt of the shortfall, are planning for budget reductions ranging from 5 percent to 10 percent.

    Although Pawlenty has stated he will not support tax increases, measures such as closing various business tax "loopholes," eliminating certain exemptions and approving other changes that would increase revenues without raising tax rates will likely be discussed. Fee increases for various permits and other approvals will almost certainly be up for debate as well.

    DFL Increases Majority in House, but Vetoes Still Possible

    Across-the-aisle dealmaking will be necessary next year in order to pass a budget. DFLers in the House of Representatives expanded their majority by two seats for a total of 87 DFLers to 47 Republicans in the November election, but did not win a veto-proof majority of 90 seats. In the Senate, DFLers picked up both seats—a DFL seat and a Republican seat—that were up for grabs in special elections. DFLers already had a veto-proof majority of 45 members; now they have 46 and the Republicans 21.

    Facing DFL majorities in both houses in 2008, Pawlenty issued a record number of vetoes for a Minnesota governor. A handful of Republicans joined with DFLers last February in overriding Pawlenty's veto of a transportation funding bill. It is the only instance of a Pawlenty veto being overturned in his six years as governor. It's unlikely House Republicans will help DFLers override vetoes on significant bills in 2009.

    Tax and Fee Proposals Will Be on the Table

    Efforts to increase state revenues without raising tax rates may be popular at the Capitol in 2009. In addition, cities and counties may seek to offset any cuts to local government aid with property taxes and impact fees.

    Business property and cabin tax. Lawmakers may look to change the statewide property tax levy to a fixed rate to increase revenues. The state tax rate on commercial-industrial and seasonal residential properties has declined since the tax was passed in 2001. The decline has resulted from the fact that Minnesota law sets the amount of money to be raised by the tax each year. As property values have gone up, the tax rate has come down. Setting a fixed rate in statute would boost tax collections in future years.

    Business tax  loopholes. Business tax loopholes and other tax breaks and incentives—whether they take the form of exemptions, credits or deductions—will be scrutinized for elimination as a way to increase state revenues. Sen. Tom Bakk (DFL-Cook), the Senate tax chair, recently suggested an individual income tax increase as a possible option. His suggestion elicited a response from the governor that such a tax increase would do little to solve the budget problem.

    Rep. Ann Lenczewski (DFL-Bloomington), the House tax chair, is suggesting—as she did last session—that the corporate tax rate be lowered to 8.8 percent from 9.8 percent by eliminating existing tax breaks and incentives directed to businesses, including research and development tax credits and some tax benefits for businesses located in tax increment districts.

    Sales tax expansion. Minnesota does not currently impose a sales tax on clothing and most services. Proposals will be discussed to expand the state's sales tax base as a way to increase revenue collections. Minnesota has a long tradition of not taxing necessities, but of the 45 states that impose a sales tax, 40 states tax clothing sales. In addition to clothing, there will be attempts to expand the state's sales tax base to services such as car repairs, haircuts, tax preparation, advertising and legal advice.

    Transportation utility fees. A proposal to allow cities to impose a fee on property owners based on the amount of traffic their property generates, though unsuccessful in previous sessions, will likely surface again. Transportation utility fees could be $3 to $5 a month for single-family homes, whereas high-density commercial properties could be assessed significantly more.

    Casualties Will Be Wide Ranging

    Other responses to the budget crisis could include rolling back increases in state aid to local governments that were approved last year.

    A constitutional amendment—passed by the voters this fall that raises the state sales tax by three-eighths of 1 percent and dedicates the revenues to outdoor, arts and cultural resources—could give legislators a reason to revisit existing funding for these programs.

    And although conversations regarding a new Vikings stadium will probably resume, getting state funds for a refurbished Metrodome or new facility will be extremely difficult.

    Economic Stimulus Proposals Likely

    With recession conditions expected to continue, government spending to create jobs and promote economic development will be considered. While it's not clear where the money for such initiatives would come from, lawmakers will feel pressure to pass some sort of economic relief package.

    Capital projects. Many elected officials in Minnesota and around the country are pushing for federal spending on transportation and other infrastructure projects. At the state level, capital projects such as transportation and other infrastructure investment are certain to emerge.

    Green jobs. Minnesota already has a state standard under which renewable resources such as wind and solar power must provide 25 percent of the state's energy by 2025. Pawlenty has outlined a proposed package of tax credits and other incentives that could help companies create new jobs related to renewable and clean energy.

    Extend unemployment. President George W. Bush signed an extension of jobless benefits into law this year on November 21. Unemployment insurance involves both federal and state statutes, and each state administers its own program. With unemployment insurance claims rising dramatically in the past months, legislators may propose changes in the state program with regard to which employees are eligible for compensation, the amount they receive and the period of time benefits will be paid.

    Policy-Related Bills May Gain Attention

    With spending opportunities severely curtailed, legislators will turn their sights toward policy initiatives. Environmental protection measures and health care reform will likely be among the highest priorities.

    Cap and trade. Proposals to control greenhouse gas emissions received great attention in 2008. Cap and trade—a system that involves providing economic incentives for achieving reductions in emissions of pollutants—has become a hot topic. The governor's Legislative Greenhouse Gas Accord Advisory Group will issue a report January 15 on the economic impact and potential revenue from a regional cap and trade system.

    Consumer product bans. Consumer products containing bisphenol-A and other chemicals were the subject of much debate in 2008. A bill to create a pilot program to recycle unused paint was also proposed. In the end, each of these proposals was either vetoed by the governor or defeated in the legislative process. Expect continued attempts to ban products and require businesses to recycle products in the coming session.

    Recycling. The Minnesota Pollution Control Agency will report to the Legislature this session regarding progress on abatement of land pollution and suggested remedies for problems related to solid waste generation. The recommendations could include prohibiting certain types of packaging and containers.

    Health care reform. While some health care reform discussion is possible, state lawmakers may wait to see what policy direction President-elect Barack Obama's administration takes. Existing access problems could be exacerbated—particularly affecting public hospitals and nursing homes—if state and federal agencies reduce provider reimbursement rates to help relieve strained budgets.

    Mortgage foreclosure moratorium. Legislators saw multiple bills in 2008 relating to prevention and handling of housing foreclosures, including a proposal to defer foreclosure of up to 12,000 homeowners' properties for one year. The governor vetoed this deferment bill. Continued fallout in the housing market will likely result in more bills this session. A moratorium on foreclosures as well as mandatory mediation between lenders and homeowners will be considered.

    Workers' Compensation. Labor and Industry Commissioner Steve Sviggum, a former House speaker, has announced a workers' compensation reform plan he hopes to push through this year. Components of the plan include giving employers more control over where injured workers receive treatment as well as changes to billing and reimbursement procedures.

    K–12 Education Funding Could Get Revamped

    Rep. Mindy Greiling (DFL-Roseville), House K-12 Education Finance Division chair, held statewide public hearings on her education finance reform bill over the interim. The intent of the bill is to overhaul how K-12 education funding is handled in the state.

    Adhering to a bipartisan agreement with the governor's office not to cut K-12 education spending, the legislature this year approved additional state funding of $51 per pupil—a 1 percent increase. It also authorized school districts to take an additional $51 per pupil from their operating capital levies.