CHICAGO — Minnesota Gov. Mark Dayton on Monday dropped his proposal for an income tax surcharge on top earners after the state announced a new revenue forecast that trimmed nearly $1.2 billion off the $6.2 billion deficit looming in the next two-year budget cycle.

The latest forecast boosted the ending balance expected in the current fiscal year ending June 30 by $264 million to $664 million.

The state now expects to collect an additional $900 million in the next budget cycle over the previous forecast.

The numbers paint a rosier picture than the forecast released in November. The state issues formal revenue forecasts in November and February. The governor uses the first to craft a budget and the Legislature uses the second to finalize the spending plan.

Dayton issued a statement saying he would eliminate his proposed surcharge and restore about $200 million in human services spending cuts in a revised budget plan to be announced in the coming weeks.

He planned to hold a news conference late Monday to discuss the changes and latest forecast.

“An improved outlook for state revenues, due in part to changes in the capital gains forecast, was responsible for most of the additional revenue,” the Office of Management and Budget report said.

Despite the improvement, Minnesota still faces a $5 billion deficit in the next budget cycle and a $4.4 billion structural deficit after fiscal 2013. General fund revenues are now expected to total $30.7 billion in the current biennium and $33.3 billion in the next one.

The state’s reserves remain lean with its cash-flow account carrying a balance of $266 million and its formal reserve holding just $9 million.

Though improving, general fund revenues in the current biennium remain about $1.4 billion below 2008-2009 levels, according to the report.

Dayton, the freshman Democratic governor, last month unveiled a two-year, $64 billion spending plan that relied heavily on income tax increases to overcome the budget deficit.

It assumed $2.4 billion of new revenue from permanent income-tax increases and $918 million from the temporary income-tax surcharge of 3% on residents who earn over $500,000. A surcharge on health care providers would raise another $877 million.

The budget would cut higher education and health and human services. It also would save money by postponing a plan to begin repaying $1 billion of school aid that was frozen as part of the current budget. State aid to local governments would be maintained.

Republicans who control the Legislature have said they would not pass any tax increases.

Minnesota’s $4.2 billion of GOs are rated AAA by Fitch Ratings and Standard & Poor’s and Aa1 by Moody’s Investors Service, all with stable outlooks.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.