The Twin Cities legislators whom Gov. Mark Dayton needs to pass his tax overhaul raised serious questions Monday about critical pieces of the budget package.

Several DFL legislators were openly skeptical of the proposed $500 property tax rebate and the DFL governor's decision to raise tobacco taxes but not those for alcohol.

Dayton's budget, the most comprehensive reworking of the tax system in a generation, is fraught with political landmines. With Democrats controlling the House and Senate, Dayton faces the best chance he may ever get to pull off a dramatic budget overhaul. But with fragile majorities, DFLers can't afford any discord that causes members to splinter off.

The skepticism evident Monday follows a week of criticism from others, including business leaders fighting proposed taxes on business services and retailers battling to block a possible sales tax on clothing. Dayton and his commissioners are mobilizing to sell the package statewide.

The governor hopes to build support for the package among Minnesotans by offering an attractive incentive -- a $500 property tax rebate that would go to homesteads and farmsteads across the state.

But the giveback also could exacerbate a long-simmering urban-rural divide in the Legislature.

Rep. Alice Hausman, DFL-St. Paul, questioned the fairness of a one-size-fits-all rebate. For rural homeowners, $500 could be a significant percentage of their tax bill and they could pay next to nothing. For those in the Twin Cities with property bills topping several thousand dollars, she said, the rebate would represent just a small fraction of their overall bill.

"Help me understand for a metro taxpayer how we get to a tax system that is fair to all," Hausman said.

Commissioner Jim Schowalter of Minnesota Management and Budget acknowledged that some components might favor one group over another, but he said the overall proposal is fairer than the current system and would bring stability to the state budget.

Republicans say they see dramatically inflated state spending with little evidence of benefit to the economy.

"It looks like a good deal for government, it's a good deal for bureaucracy," said Rep. Matt Dean, R-Dellwood. "But it's a bad deal for small business and a bad deal for the economy."

Republicans also criticized Dayton for delaying until 2017 the repayment of the $1.1 billion owed to K-12 public schools. Many Republicans want to drain budget reserves to pay back the schools sooner.

Schowalter said that whittling down the projected deficit is more critical than wiping out the school shift. He opposes emptying budget reserves, which he said could leave the state vulnerable in the event of another economic slump.

Several legislators questioned Dayton's plan to raise the cigarette tax from $1.23 to $2.17 per pack.

What about alcohol?

Former Gov. Tim Pawlenty raised the tobacco tax several years ago, but the state's alcohol tax has not been touched in decades.

"It could be that general taxpayers are subsidizing the alcohol industry, and that would not be right," said Rep. Jean Wagenius, DFL-Minneapolis.

Schowalter said his boss is not a fan of the tobacco tax. The goal, Schowalter said, is to get Minnesotans to quit smoking, not raise a lot of money from it.

"There is a really strong linkage between cigarette smoking and health problems," Schowalter said.

Rep. Phyllis Kahn, DFL-Minneapolis, said societal issues with alcohol are just as strong as with cigarettes: Courts are clogged with alcohol-related cases and alcoholics leave a lasting and expensive impact on families and social services.

Kahn said the state could rake in a substantial sum from imposing even a modest tax hike on alcohol sales. That revenue could help fund treatment programs and aid the state's overall bottom line, she said.

"The alcohol tax seems to be one of those things that is invisible to the population," said Kahn. "We really need to be looking at it."

Republicans blasted the budget for cuts that are less than they appear to be.

Some of the $225 million in logged reductions are really a shift of costs to other funds or departments.

Rep. Denny McNamara, R-Hastings, put it bluntly: "I want to know how many are cuts and how many are camouflage. How much is a cut and how much is a paper shuffle?"

Schowalter said that agency heads were ordered to find ways to make government run more efficiently and effectively, not just blindly whack from the bottom line.

Baird Helgeson • 651-925-5044