Gov. Mark Dayton wants to earmark a giant share of the state’s $1.2 billion projected budget surplus for tax relief and to build up the state’s budget reserves.

The DFL governor wants $616 million in tax breaks for businesses and middle-class Minnesotans, including the repeal of three new sales taxes on warehousing services and telecommunications equipment and repair. The proposal also includes tax relief for married couples, Minnesotans with student loan debt and working families.

“Our improving economy has greatly improved the state’s budget forecast – giving us the opportunity to put more money in the pockets of Minnesota families and businesses,” Dayton said. “I urge members from both parties to work together to pass these tax cuts quickly.”

The proposal now goes to the DFL controlled House and Senate, where legislators have their own ideas on how to spend the money. The Minnesota House is expected to give final passage to a $500 million package of tax relief Thursday afternoon.

Republicans have been generally supportive of the tax relief, but blasted Democrats for imposing more than $2 billion in new taxes last year and then wanting credit for giving some of it back now.

"It's Minnesotans' money," Republican House Minority Leader Kurt Daudt said recently. "Give it back."

About half of the proposed tax relief would undo tax increases Dayton and Democrats imposed last year to beat down a more than $600 million deficit, repay debt to public schools and increase money for education.

Dayton said those choices were prudent then, but the state's robust economic growth gives them the chance to make revisions that make the tax system more fair.

“For those people who say we are not using wisdom in our mid-course correction based on changing circumstances, they are not in touch with reality,” Dayton said.

The significant windfall is adding a dose of election-year drama to the legislative session as both Dayton the House face voters in November.

The state has emerged from the deepest recession since the Great Depression and has been able to refill depleted budget reserves and pay back nearly $3 billion owned to public schools. For the first time in more than a decade, legislators have their first true surplus to divvy up. The extra money offers many advantages, but brings a lot of headaches as legislative leaders feel growing pressure from cash-strapped activist organizations that rely on state funding.

"There are a lot of needs out there that I am not addressing and there are people who are going to be unhappy with that, and I regret that," Dayton said.

Dayton is proposing eliminating the so-called marriage penalty, which means 650,000 married will no longer pay higher taxes than singles making the same amount of money.

He also wants to expand the working family credit, which would save the average Minnesota family $334 a year.

The governor is also pushing a plan to expand tax credits for child care, saving the average taxpayer who qualifies $430 per a year.

College graduates with student debt would save an average of $140 a year, under the plan.

The governor is also proposing streamlining business taxes to make them square with federal laws, vastly simplifying recording keeping for small businesses.

Dayton’s plan includes additional tax breaks for seniors, teachers, homeowners and veterans.

The governor wants to do away with a much-criticized new sales tax on repair and maintenance of farm equipment. He is seeking greater tax breaks for start-up businesses and entrepreneurs.

The governor’s proposal also seeks to modify the estate tax and eliminate the gift tax, which has been widely criticized.

The proposal doubles the exemption on the estate tax, to $2 million. Minnesota would no longer be one of just a couple states to impose a gift tax, under the plan.

Dayton is urging legislators to act in the next couple weeks, giving the state time to implement the changes before Tax Day. Many of the proposed tax breaks would be retroactive to 2013, such as the adoption credit and an income tax break for people who lost their home to foreclosure or a short sale.

"Minnesotans should know if the Legislature doesn’t act, it will cost them some of the tax savings I am proposing," Dayton said.

Dayton is not proposing making the marriage penalty retroactive, saying it would be too cumbersome to implement in the final few days as Minnesotans file their taxes.

The governor is seeking some new spending, about $162 million. Much of that money would go for raises for state-paid health care workers and extra money for low-income heating assistance.

Dayton would devote an additional $30 million to retain critical corrections staffers and pay for the state’s growing prison population.

He wants to set aside an additional $3.5 million to ensure that low-income students get a hot school lunch.

An additional $3 million would be set aside to pay for additional borrowing to fund statewide construction projects.

Dayton wants to use the remainder, about $455 million, to increase the state’s existing budget reserves of about $661 million.

Elected leaders have generally been comfortable with the existing reserve levels, but the last downturn showed that the amount was not nearly enough.

Minnesota Management and Budget Commissioner Jim Schowalter has said the larger reserve would give the state more cushion when the economy slides again.

The measure could also please the state’s credit agencies, which lowered the state’s credit-rating in recent years as the state relied on one-time accounting shifts and borrowing to nurse the state through the rough patch.

House Speaker Paul Thissen, DFL-Minneapolis, praised the proposed revisions to the state budget.

“Minnesota is headed in the right direction and the way to continue building on our progress is to expand middle class economic opportunity,” he said. “Governor Dayton’s supplemental budget has the right priorities to continue growing our economy from the middle out.”

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