By Bill Salisbury

St. Paul Pioneer Press

ST. PAUL — After first rejecting a DFL tax bill, the Minnesota Senate has narrowly passed a comprehensive overhaul of the state’s tax system, and included $327 million in state aid for Mayo Clinic’s $6 billion “Destination Medical Center” project.

Leaders of the Democratic-Farmer-Labor majority were surprised Monday, April 29, when senators first defeated the measure on a 34-32 vote. Seven, mostly suburban DFLers voted with the Republican minority against the bill.

But after DFLers met behind closed doors, they returned to the floor, and Sen. John Hoffman, DFL-Champlin, who had voted “no,” moved to reconsider. After a second lengthy debate, the bill passed 35-31.

Two DFL senators who earlier had voted against it — Greg Clausen of Apple Valley and John Hoffman of Champlin — switched their votes to “yes,” and a third who had not voted the first time, Ann Rest of New Hope, also voted in favor.

Sen. Dan Sparks, DFL-Austin, voted for the bill.

The bill would raise an additional $1.8 billion over the next two years by increasing income taxes on the highest paid, extending sales taxes to clothing and personal services, and raising cigarette taxes.

The Senate vote set the stage for three-way tax talks to start at the Capitol.

Gov. Mark Dayton and the DFL majorities in both chambers have put separate tax increases on the table. Now a House-Senate conference committee and the governor’s team will try to hash out an agreement on how much to boost taxes and who would pay them.

But the Senate almost didn’t get there.

Senate Majority Leader Tom Bakk, DFL-Cook, shrugged off the temporary setback. “Passing tax bills is always the hardest vote,” he said.

Sen. David Senjem of Rochester was the only Republican to support the bill. He voted in favor both times it came to the floor.

Although he opposed the tax increases, he said, he supported the measure because it would subsidize “the largest economic development project in this state’s history,” the expansion of the Mayo Clinic in his hometown.

The Mayo funding, he said, “is a rose in a bed of rocks.”

Under the legislation, the state’s top income tax rate would increase to 9.4 percent from 7.85 percent on the taxable income of $80,000 or more for singles and more than $141,000 for couples.

The increase would boost taxes on the highest-paid 7 percent of Minnesota taxpayers.

Senate Taxes Committee Chairman Rod Skoe, DFL-Clearbrook, cited a study that showed the wealth of the top-earning 7 percent of Americans had increased by 28 percent in recent years while the assets of those earning less have declined.

“Since we try to tax based on ability to pay, this is appropriate,” he said.

But Republicans warned it would boost taxes on middle-class taxpayers.

“We’re talking about a teacher and a cop; we’re talking about farmers,” said Sen. Carla Nelson, R-Rochester.

Dayton has proposed limiting income tax increases to the top-earning 2 percent of taxpayers, and the DFL House voted to raise the taxes for the top 1.1 percent.

Skoe said the Senate bill raises enough money to erase the state’s projected $627 million deficit, provide property tax relief and pay for the education, health care and other services funded in the spending bills.

But Sen. Julianne Ortman of Chanhassen, the Taxes Committee’s ranking Republican, said lawmakers could balance the budget without increasing taxes.

“Why are we doing this? I would say it’s profligate spending and over-taxing,” she said.

Overall, the bill calls for the most extensive revision of the state’s tax laws in a generation. It would broaden the sales tax base by taxing clothing, over-the-counter drugs and a wide range of tax-exempt personal services while lowering the tax rate to 6 percent from 6.875 percent.

Rest, the chief architect of the sales tax revision, said it’s a change “that modernizes our system, that acknowledges that we have a far different economy than we had 50 years ago,” when consumers spent far more of their incomes on goods, not services.

Among the services it would tax are haircuts, tattoos, auto and furniture repairs, digital downloads, computer software and admission to boat and trade shows and professional sports events.

Sen. Paul Gazelka, R-Nisswa, called them “staggering and eye-popping” tax increases.

But the House opposes increasing sales taxes, and Dayton has dropped his plan to broaden the sales tax base. So that will be a hot issue in the final negotiations.

The bill also would:

— Increase cigarette taxes by 94 cents a pack.

— Provide an additional $125 million in state aid to local governments to hold down property taxes and also exempt cities and counties from paying sales taxes.

— Cut the corporate income tax rate to 9 percent from 9.9 percent, but close what Rest called corporate loopholes for foreign investments.

— Lift the sales tax on capital equipment purchases by businesses and enrich the state’s research-and-development and “angel” investor tax credits.

— Impose a 13 percent wholesale tax on sports memorabilia — such as jerseys, posters and trading cards — licensed by professional and large college leagues and teams.

— Require Amazon and other Internet retailers to start collecting state sales taxes, halting their advantage over in-state retailers that collect those taxes.

— Offer tax breaks to promote expansions of the 3M Co. in Maplewood, Baxter Healthcare Group in Brooklyn Park and Mall of America in Bloomington.

— Allocate $30 million to restore the state Capitol, far less than the $109 million that Dayton and House leaders want to borrow for that project.