UPDATED: Minnesota's budget deficit to drop by $1.2 billion

ST. PAUL - Minnesota's new budget deficit will be about $5 billion, down from $6.2 billion, but there are so many unanswered economic questions that the budget also could end up in worse shape.

Even with the better number, the state faces a massive deficit that legislators and the governor will debate through the spring. Gov. Mark Dayton immediately changed his proposed budget to eliminate an income tax surcharge and restore funding to health programs such as nursing homes.

The improved number is a "modest and helpful improvement," Commissioner Jim Showalter of Minnesota Management and Budget said. "This does not mean the crisis is over. ... There are still quite a few budget challenges ahead for the state."

Today's budget report contains more uncertainty than a few months ago, State Economist Tom Stinson said. But, he added, the uncertainty means the outlook could either degrade or improve.

One concern is rising oil and gasoline prices, Stinson said. A relatively modest increase in gasoline prices could offset an income tax cut Congress and President Barack Obama approved in December, he said.

To put the Minnesota budget in perspective, a $5 billion deficit still is worse than the Wisconsin deficit by more than $1 billion. Minnesota and Wisconsin budgets often are compared and Wisconsin is in national news these days as its Republican governor and Legislature try to cut spending.

The Minnesota figures released today give Democrat Dayton and Republican legislative leaders an idea about how much money they have to work with as they prepare a budget for the two years beginning July 1. They are supposed to wrap up their budget work by May 23, when the state Constitution requires lawmakers to end regular-session work this year.

Some in the Legislature predict that deadline will be difficult to meet, given the differences between Republicans and Dayton, and say a special session may be needed to prevent the state from running out of money and government services shutting down.

Minnesota's deficit improved mostly because of $984 million higher expected revenues in the next two years. And much of that came from federal government changes, Stinson said.

The noontime report, known as a budget forecast, included a $176 million spending reduction. The report did not factor in any budget proposals from Dayton or lawmakers.

Revenues, mostly from taxes, are expected in the next two years to be $33.3 billion. At the same time, spending under current law would top $39 billion, and the state checkbook would have a $938 million balance going into the new budget.

En route back to Minnesota from a National Governors' Association meeting in Washington, D.C., Dayton said that the better forecast means he will not pursue a proposed 3 percent income tax surcharge on people earning more than $500,000 a year, which will keep Minnesota from having the highest tax rate.

Dayton also announced he will add back $200 million of cuts he planned for nursing homes, home health care providers and other health programs.

The changes will be made to the budget plan Dayton presented two weeks ago.

Republicans who control the Legislature say they will release their own budget outline within a couple of weeks. Committees hammering out budget details must have their work done by March 25.

Big differences remain between Dayton and GOP leaders.

Dayton's budget plan called for spending $37 billion, while Republicans insisted on $32 billion. It was not immediately clear how they would deal with a better-than-expected budget projection.

Republicans had said they would negotiate how to spend the $32 billion, but refuse to raise more money.

Among Dayton's proposed tax increases are his much-discussed plan to raise taxes on the richest 5 percent of Minnesotans, joint filers who earn more than $200,000 a year.

He also would tack on an extra property tax on homes worth more than $1 million.

Republicans say such tax increases will drive away businesses and business leaders that Minnesota needs to produce new jobs. They prefer cutting business taxes and finding other ways to make life easier for Minnesota companies.

Dayton and Republicans agree that they must cut spending from what agencies and other entities that receive state money expect to receive. Dayton's plan chops $1 billion from spending.

The governor would keep state payments to local governments stable, but in an early Republican budget bill, vetoed by Dayton, there would have been cuts.

Don Davis reports for Forum Communications Co.