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Deficit is smaller, but political divide remains big

ST. PAUL — While the state’s budget forecast is $1.2 billion rosier, it became clear on Monday that Republicans and Democrats are still a long way apart when it comes to solving the state’s budget deficit.

Minnesota’s projected budget shortfall has shrunk from $6.2 billion to $5 billion. A jump in projected revenue of $984 million over the next three years brightened the state's fiscal outlook.

State economist Tom Stinson said the compromise over the Bush-era tax cuts worked out by President Obama and Republicans in December worked as a "stealth stimulus package" and improved the state’s budget. In particular, he said, the continuation of a 3 percent reduction in the payroll tax, extension of unemployment benefits and a delay in increasing taxes on capital gains helped to fuel Minnesota’s improved economic outlook.

Republicans argued that this updated forecast proves tax cuts do boost the economy. House Tax Committee Chairman Greg Davids, R-Preston, said he plans to make an even greater push to phase out the corporate income tax rate and decrease income taxes on middle-income earners.

"I’ve been moving ahead with those (tax reductions) before today, but now it makes it so that I can approach it more aggressively," Davids said. He also argued that with revenue increasing roughly 9 percent over last year, the Legislature should be able to balance the budget without tax increases.

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But DFL lawmakers take a different view. Rep. Tina Liebling, DFL-Rochester, said the revenue boost is only temporary and now is not the time to cut revenue while the state still faces a $5 billion budget deficit.

"This is one-time money, and we are in the problem we are in Minnesota because we took one-time money and made permanent tax cuts. That seems to be an ill-advised policy," Liebling said.

DFL Gov. Mark Dayton responded to the improved budget forecast by scrapping his proposal to temporarily impose a 3 percent surcharge on people making more than $500,000 in taxable income. He also announced he would use the additional revenue to restore cuts in funding for nursing homes and home health care and invest more money in research and development credits.

The governor said that the updated forecast shows that job creation is continuing to lag in the state and now is the time to pass his $1 billion public works borrowing bill, something Republicans oppose.

"It is in my view vital in putting people back to work across Minnesota," he said.

Republicans continue to oppose other tax provisions in the governor’s bill, including higher income taxes on Minnesotans whose taxable income is more than $130,000 a year and a state property tax on houses valued at more than $1 million. Sen. Carla Nelson, R-Rochester, said Minnesota cannot afford to have one of the highest income tax rates in the country.

"We can’t make Minnesota an island. It’s very competitive for jobs, job providers, job creators," she said.

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