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The new spending to staff a prison at Moose Lake and the state's secure mental hospital in St. Peter is part of about $202 million that Pawlenty urged legislators to appropriate through mid-2007 to boost spending the Legislature approved last summer.

Pawlenty also proposed increasing state budget reserves by $159 million and reducing state revenue by about $29 million by giving married couples a state tax break they have been able to claim on their federal income taxes since last year.

The supplemental budget, which covers the final 15 months of the current two-year budget, is Pawlenty's plan for divvying up a projected $88 million budget surplus and $317 million that is set aside by law in a "tax relief account" that has no designated purpose.

He recommended that lawmakers transfer most of the tax-relief money to the general fund, the budget category that funds most state services, and use only $49 million for actual tax relief. Most of the $317 million would help pay for $202 million in new spending he urged lawmakers to approve.

In response, legislative leaders ‹ both Democrats and Republicans ‹ said they wanted significantly more of the $317 million to go into tax relief, especially property tax relief.

"We're going to do real property tax reform and relief," said Sen. Larry Pogemiller, DFL-Minneapolis, the Senate Tax Committee chairman. Pogemiller hinted Senate Democrats would propose "hundreds of millions" of dollars in tax relief, but he refused to be specific.

The big unknown for both Pawlenty and legislators this year is how, and when, the Minnesota Supreme Court will rule on the state's appeal of a lower court decision striking down a new cigarette fee that yields $200 million a year for the state. So far, the state is continuing to collect the disputed fee.

But, if the Supreme Court agrees the fee is barred by a 1998 court settlement between the state and several big cigarette manufacturers, Minnesota would have to stop collecting the fee and pay refunds. That would create a huge hole in the budget.

The Supreme Court is scheduled to hear oral arguments in the case April 10. It is not clear whether the court will rule by May 22, when the legislative session is scheduled to adjourn.

Pawlenty, whose insistence that the new 75-cents-a-pack charge on cigarettes be called a fee rather than a tax is a major issue in the court case, downplayed the notion that the $159 million increase he proposed in state reserves was a cushion against an adverse ruling by the Supreme Court.

But Republican House leaders and Senate Democrats stressed that preparing for the possible loss of that cigarette fee revenue was a major concern. "One of the things we're going to be talking about is preparing for a negative ruling," said House Speaker Steve Sviggum, R-Kenyon.

Rep. Matt Entenza of St. Paul, the leader of the House Democratic minority, said some House Democrats were preparing legislation that would eliminate some of the uncertainty by re-passing the 75-cent fee as an increase in the existing 48-cents-a-pack excise tax on cigarettes.

Pawlenty's major proposal for tax relief was the plan to allow married couples this year and in future years to take the same standard deduction for state income taxes as they do for federal income taxes. The marriage penalty costs most Minnesota couples about $91 in extra taxes.

"This proposal is a no-brainer," Pawlenty said. "Minnesota's married couples should not have to pay a higher tax."

Pogemiller accused Pawlenty of opposing the same federal tax conformity last spring, when it would have applied to both 2005 and 2006. Pogemiller predicted Senate Democrats would approve the tax break retroactive to last year.

Pawlenty also proposed that legislators pass a law that would limit property tax increases by cities and counties ‹ but not by school districts ‹ to a level justified by inflation and population increases. Property taxes have increased 25 percent in three years.

But both Pawlenty and Sviggum predicted that lawmakers would not approve the proposed levy limits.

Patrick Sweeney covers state government and its effect on Minnesotans. He can be reached at 651-228-5253 or psweeney@pioneerpress.com.
http://www.twincities.com/mld/twincities/news/legislature/14099154.htm