CHICAGO – Reacting to rosier revenue projections, Minnesota Gov. Mark Dayton on Thursday offered a revised two-year budget proposal that drops changes to the state’s sales tax but leaves intact a proposed income tax increase on top earners.

Dayton said the revised economic forecast released late last month provided him the opportunity to recalibrate his tax proposals some of which, he acknowledged, lacked the legislative and public support to ensure passage.

“I think it’s a balanced approach,” Dayton, a member of the state’s Democrat-Farmer-Labor Party, said of the revised package. He stressed that the two-year budget does not rely on one-time revenues or accounting shifts as used to balance past budgets.

Republicans are opposed to the income tax hike but the DFL Party enjoys a legislative majority. “If you are not going to raise income taxes….then where are you going to get the additional revenues or where are you going to cut,” Dayton said of his critics.

The income tax hike would raise about $1.8 billion in new revenue over the next two years. It would erase a looming deficit of $627 million and fund $640 million in additional spending on education and provide more funds for economic development initiatives.

Dayton said he expects in the coming weeks to announce plans for a $750 million capital budget, referred to locally to as the bonding bill. Dayton said the state can afford the borrowing and the operating budget includes the additional $22 million in funds needed for debt service on the borrowing.

Minnesota’s February forecast added $295 million to its surplus this year and chopped $463 million off the state’s projected $1.1 billion deficit for its next two-year budget that begins July 1, leaving the looming deficit at $627 million.

Under state law, most of the new fiscal 2013 surplus will go to further pay off school aid delayed to help close the fiscal 2012-2013 budget deficit. The state will still owe about $800 million to districts and does not expect to make good on those payments until fiscal 2016-2017. About $5 million of the balance will go to the state’s budget reserve bringing it to $649 million. The revised projections are due to higher than previously expected revenues and a decrease in spending.

Dayton’s original $37.9 billion two-year budget raised the income tax on the wealthy and dropped the state’s sales tax rate but broadened it to include business and consumer services to raise $2 billion.

Dayton drops the changes to the sales tax in his revised proposal. He also killed a property tax rebate that would have cost $550 million. Dayton left intact a proposed cigarette tax increase which would generate $370 million, and the elimination of some corporate tax loopholes.

Standard & Poor’s rates Minnesota AA-plus and Moody’s Investors Service rates the credit Aa1, with a negative outlook. Fitch Ratings rates the state’s $6 billion of GOs AA-plus.

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