Minnesota Deficit Shrinks; Dayton Drops Income Surtax

By Martiga Lohn | February 28, 2011 | 3:48 PM EST

St. Paul, Minn. (AP) - Minnesota's projected budget deficit shrank by a fifth to $5 billion on Monday, prompting Gov. Mark Dayton to withdraw his proposal for a 3 percent temporary surtax on top incomes and reduce proposed cuts to nursing homes and other health and welfare programs.

The forecast from Minnesota Management and Budget officials showed the shortfall for the coming two-year budget was down from an earlier projection of $6.2 billion. State economist Tom Stinson attributed the improvement to federal action that helped the economy, including a payroll tax cut and delay in a capital gains tax hike.

Dayton immediately dropped his call for a 3-year surtax on incomes starting at $500,000, which would have raised $918 million in the upcoming budget period. The Democratic governor said he was fulfilling a promise to avoid imposing the nation's highest tax rate. Still in play, though, is his call for a new permanent top income tax bracket of 10.95 percent, just a hair under Hawaii's top-in-the-nation rate of 11 percent.

The governor was due to hold a news conference later Monday.

"I characterize this as a modest and certainly helpful improvement in our revenue outlook. There are still quite a few budget challenges ahead," Management and Budget Commissioner Jim Schowalter said at a news conference.

Dayton and lawmakers still face a mammoth budget problem. By the latest numbers, the deficit is nearly 13 percent of the state's general fund. The governor and the GOP-controlled Legislature are split on how to handle the shortfall, with Dayton pushing for new high-end income and property taxes and Republican leaders vowing to erase the deficit through spending cuts.

Republicans are expected to outline their budget plan by the end of March. They adamantly oppose Dayton's push to raise taxes.

The two sides even disagree on the accuracy of the deficit number itself, with Republicans saying it's overstated because it includes automatic increases in programs such as public health care, which the Legislature could tinker with. Democrats say the gap is bigger than it appears because about $1 billion in inflation isn't counted in the official number.

With federal stimulus dollars drying up, Minnesota government has already tapped its savings, delayed almost $2 billion worth of payments to schools and made other accounting shifts to stay ahead of the financial hole. Policymakers have few moves left, other than raising taxes or cutting spending.

Twice-yearly forecasts are used to set the budget, giving the most accurate projection of tax collections and spending patterns.

Dayton also asked Republican legislative leaders to quickly reverse a 2010 law delaying business tax refunds, saying the state no longer needs the move to stay solvent. Schowalter said Minnesota is no longer in danger of running out of cash before the current fiscal year ends in June.


Associated Press writer Patrick Condon contributed to this report.