Gov. Mark Dayton is intent on raising income taxes on high earners in Minnesota even as he jettisons parts of an ambitious tax overhaul package that has stirred division at the State Capitol for weeks.

When Dayton unveils his new budget proposal this week, the plan will lean heavily on a tax hike for the wealthiest 2 percent of Minnesotans and he is strongly considering a significant bump in the tobacco tax, sources say.

The DFL governor is likely to use the extra money to wipe out the deficit and pay for new education initiatives, boost aid to local governments and increase money for public safety.

Dayton convened his top budget and tax officials Saturday morning to map out a new path forward. This came after weeks of damaging criticism from business leaders that finally prompted him to announce Friday that he would scrap his sweeping tax overhaul and craft a more modest proposal.

Dayton’s retreat comes just as a new Star Tribune Minnesota Poll shows his public popularity at its lowest level since taking office two years ago.

“My goals were to reform taxes overall in Minnesota and to make taxes fairer for middle-income families,” Dayton said, highlighting his income tax hike for high earners. “That’s what I have been championing in Minnesota for four years, before I was elected, after I was elected and continue to.”

The poll, meanwhile, found that negative impressions of the governor have ticked up, as well.

Dayton’s approval rating fell to 45 percent in a statewide survey conducted late last month, before Dayton scrapped his tax plan, the poll found. That compares with a rating of 53 percent in September.

‘Businesses are concerned’

Dayton’s budget proposal was the culmination of more than a year of meetings around the state, spawning a profound realigning of the state tax system.

In the end, Dayton withdrew the plan after just six weeks, before he could tour the state to sell the proposal and before it faced any significant legislative tests.

The governor remains fiercely committed to his campaign pledge to raise taxes on individuals with a taxable income of more than $150,000.

That new money would help erase the projected deficit of $627 million, which state budget officials just lowered from $1.1 billion.

But the state’s improving fortunes are now giving Republicans traction to fight the rest of Dayton’s tax package.

“Businesses are concerned about these taxes,” said Senate Minority Leader David Hann, R-Eden Prairie. “These things are an additional burden on the economy, which is already struggling.”

Dayton was already telling fellow DFLers, who control the Legislature, that he did not expect his sweeping package to become law. Soon after he released his budget outline, he gathered with DFL legislators in a rare private meeting.

According to several accounts, he told legislators that this was his best shot at major tax reform but that he expected there would be parts legislators would not accept.

“I said from the outset, mine is the first word in this discussion,” Dayton said. “I never thought my proposal was going to pass through the legislative process and become law, as initially proposed. It was to launch a discussion.”

Republicans have criticized Dayton for floating the business taxes proposal if his heart was never truly in it. They say it created an incredibly dangerous and unsettling atmosphere for companies in an already weak economy.

“Minnesotans deserve more than a governor who just takes the best swing at it,” said Rep. Kelby Woodard, R-Belle Plaine. “I understand that things are going to change and this is a dialogue. But at the end of the day, that’s not good enough.”

Privately, some DFLers said they wanted Dayton to keep the business tax plan alive longer, mainly to make political rivals sweat. They would have preferred that he traded it away late in the session, perhaps persuading business leaders to go along with other tax concessions.

Supporters see leadership

Rep. Ryan Winkler, DFL-Golden Valley, said state leaders should not ditch the plan just because business leaders complained loudest.

Many businesses would have benefited from the lower sales tax rate Dayton proposed, a message Winkler and others said got drowned by the roar of leaders of the largest businesses.

“The business community is the largest lobbying presence at the State Capitol and has the most money to tell us what ideas are bad,” Winkler said. “3M knows how to get ahold of us. The little stores down the street in Maplewood don’t. It’s not our job to just react to the loudest complainer.”

Dayton supporters said his decision to scrap the tax plan says a lot about him as a leader. The governor spent weeks meeting with those potentially impacted by the new taxes. Once he became persuaded to back away from the idea, he did it the moment he became certain, without considering what might be the most politically advantageous.

The timing of Dayton’s announcement surprised even some staffers, who expected it to be released early this week.

“He’s going to be judged by what he’s done, what the administration has done, not by what he’s doing in the middle of the Legislative session,” said Dayton spokeswoman Katharine Tinucci.

Several rank-and-file DFLers praised Dayton for killing the business tax proposal, saying they did not have the stomach for a bitter fight that might have united business leaders against them. They worked doggedly to win control of the Legislature and do not want to risk it over an unpopular tax plan.

Rep. Tim Faust, DFL-Hinckley, said imposing the business taxes would have been “a kiss of death” for many DFLers. 651-925-5044