DFL Gov. Mark Dayton and Democratic legislative leaders scrapped a proposed alcohol tax hike and an income tax surcharge on high earners as part of a last-minute budget agreement.

The leaders convened a late-night meeting Thursday to resolve crucial differences as legislators enter their final few days of the legislative session.

The rapidly-evolving tax proposal brings in $2 billion in new money through a permanent income tax increase on high earners and a dramatic hike of the tobacco tax. Married filers with a taxable income of more than $250,000 would get a 2 percentage point income tax bump, to 9.85 percent. The tobacco tax would more than double, adding $1.60 a pack.

Legislators are trying to wipe out a $627 million deficit and provide property tax relief, more education spending and aid economic development.

“We are on the cusp of an important course correction in our state’s history,” said House Speaker Paul Thissen, DFL-Minneapolis.

Republicans in the minority have been frozen out of the closed-door negotiations.

“These are taxes that are going to hit everybody in the state of Minnesota and they’re unnecessary,” said Senate Minority Leader David Hann, R-Eden Prairie. “We’ve got a $600 million problem; you don’t need to raise two to three billion dollars in revenue to solve a $600 million problem.”

In concept, the plan largely reverts to the one Dayton proposed in recent months.

Thissen had sought a temporary income tax surcharge on those making more than $500,000 to repay money owed to public schools.

On Thursday, Thissen ditched the much-criticized surcharge because “in the end Minnesotans want us to compromise.”

DFLers remain committed to paying back the $850 million owed to public schools quickly though surplus revenue in coming months and, if necessary, years.

“We’re going to absolutely make good on that promise we made with the people of Minnesota,” Dayton said of paying back school.

Senate Majority Leader Tom Bakk, DFL-Cook, has ditched his proposal to begin charging sales tax on clothing, which the retail industry fiercely opposed. Instead, the state will impose sales tax on warehousing services, electronic equipment repair and telecommunications equipment.

The tax revenue collected from that change will be used to grant a sales tax exemption for city and county governments.

The tax proposal also includes money to help with Mayo Clinic’s multibillion-dollar expansion in Rochester and slices off about $30 million to help pay the state’s share of the new Minnesota Vikings stadium.

One large component left unfinished is the proposal for $800 million in state-backed construction projects, a plan that would create thousands of jobs around the state. State borrowing requires a larger majority of votes than normal measures, which means Democrats need to secure handful Republican votes to pass the measure.

Often, that means adding a cherished project in a Republican lawmaker’s district to secure their vote.

Democrats had not reached out to Republican leaders in the House about locking down the necessary votes.

House Minority Leader Kurt Daudt, R-Crown, said he was asked to meet with DFL House leaders late Thursday night.

He would not predict an outcome of that meeting.

The House plans to vote on the borrowing proposal Friday.