Talks imploded Thursday between DFL Gov. Mark Dayton and Republican legislative leaders in the final hours before a midnight deadline, and Minnesota began a historic government shutdown.

"This is a night of deep sorrow for me," Dayton said in an address at 10 p.m. that was punctuated by jeers and hisses from Republicans, including some lawmakers.

The governor said his last offer would have raised income taxes only on those earning more than $1 million a year -- an estimated 7,700 Minnesotans, or 0.3 percent of all taxpayers, according to the Revenue Department.

Republicans rejected the proposal, Dayton said, because they "prefer to protect the richest handful of Minnesotans at the expense of everyone else."

Republican leaders made their own statement, saying Dayton's proposal for dealing with the projected $5 billion deficit would cause irreparable harm to the state's economy for generations.

"We will not saddle our children and grandchildren with mounds of debts, with promises for funding levels that will not be there in the future," said House Speaker Kurt Zellers, R-Maple Grove. "This is debt that they can't afford. It's debt that we can't afford right now."

Earlier, as it became clear there would be no deal, Republicans staged a sit-in in the legislative chambers, demanding Dayton call a special session to keep the state running.

"Our guys, obviously, are very comfortable with where we are," Zellers said, standing in the Minnesota House chamber at 8:30 p.m.

The political fight that has dominated the Capitol since January now will play out in public, as both sides try to win over Minnesotans in the hope that public sentiment will force the other side to a deal.

Dayton struck a combative stance, saying the July 4th holiday "reminds us that there are causes and principles worth struggling for" and worth "suffering temporary hardship to achieve."

The union-backed Alliance for a Better Minnesota, a key factor in Dayton's campaign last year, will run radio ads over the weekend in Bemidji, Brainerd and Duluth, focusing on reaching Minnesotans vacationing at the lakes. The group also created the website to highlight the effects of the Republican budget.

Soon after talks broke down, both sides lifted their self-imposed news blackout and began releasing details of their final budget offers.

The GOP proposed delaying another $700 million in payments owed to schools, which would add to the more than $1 billion the state already owes K-12 schools.

Republicans also offered to issue "tobacco bonds" of an unspecified amount to cover any remaining budget gap. Sources said Dayton considered the offer, but he criticized it as unwise borrowing late Thursday.

Policy as a bargaining chip

Talks may have also broken down because an earlier GOP offer asked Dayton to accept controversial policy positions the Republicans pushed for this year, including photo ID requirements at the polls and abortion restrictions. An offer sheet provided to the Star Tribune said the policy adoptions were in exchange for "new revenue in a compromise offer."

That deal also would have required tuition caps to be put in place at the University of Minnesota and MnSCU as well as a 15 percent reduction in the number of state workers by 2015. Tendered Wednesday night, the offer would have required a special session Thursday.

Throughout a long day of negotiations Thursday, anxiety was palpable across the Capitol.

Legislators coming to the building were greeted by hundreds of union protesters, urging the two sides to break the deadlock.

Gathering on the Capitol steps, some protesters held signs saying "I am a Proud Public Worker" and "Government Shutdown -- Harming Countless Minnesotans Is Not OK." Some held babies and others umbrellas to protect them from the burning summer sun. They chanted and held other signs like "Great wealth = Great responsibility."

Earlier in the day, Dayton was spotted through his office window at the head of the table, flanked by Zellers and Senate Majority Leader Amy Koch, R-Buffalo. They sipped Diet Coke and bottled water as they occasionally passed pieces of paper and computer printouts to one another, nodding and smiling slightly as one of the participants made a point.

As the afternoon wore on, legislators admitted it was tough to keep their calm as the state careened toward a political meltdown that could cost them re-election.

Early in the morning, Rep. Pat Garofalo, a Republican who chairs the House Education Finance Committee, posted on his Twitter account: "You can't spell FAILED without DFL!"

It was a blistering attack at a time when most legislators had dialed down the partisan bickering. An aide to Garofalo said he wouldn't comment on the posting.

Ideological rift

Dayton and Republican legislators have been stalemated since January over how to balance the budget and close out the projected deficit. Dayton largely won election on a promise to preserve cherished state services by increasing taxes on the richest 2 percent of Minnesotans. But Republicans won control of the Legislature for the first time in decades with a pledge not to raise taxes. The deep rift ignited a political fistfight that spilled past the regular legislative session in late May and dragged the state to the current precipice.

As the negotiators toiled over the details, more than 23,000 workers prepared for life without paychecks and the state began shooing people from state campgrounds and closing rest areas. Even before the shutdown, Minnesotans got an early peek at the inconvenience from the mothballing of many state services. Minnesotans could no longer check if their optometrists, barbers or veterinarians had valid licenses to practice. Licensing board offices and various other state agencies pulled the plug on their agency websites hours before the scheduled shutdown.

State worker Lori Sobczak tried to remain optimistic.

"There's frustration," said Sobczak, a two-year Minnesota Department of Transportation employee.

The fear is "the unknown, you know," she said. "Rumors are flying around; [a shutdown] could be, you know, 45-60 days. ... That's scary."

Adding to the ominous drumbeat, transportation workers were told to turn in their employee badges and take with them any plants that might die without water.

"They forget about the little guy that's working," grumbled Paul Eaton, another MnDOT employee in the permit division.

Eaton also said that, should there be a shutdown, there might not be much political pressure initially to resolve the situation.

"They go back to their, 'We're not going to give in, until you give this,'" Eaton said. "It could then be a big, long ordeal ... then that's really going to hurt."

The pressure from the looming shutdown stripped away months of polished rhetoric from both sides.

Republicans continued their almost evangelical crusade against higher taxes, but some warmed to the idea of more revenue from other sources, like an expansion of gambling, health care surcharges and other fees.

"I'm kind of interested in the revenue raisers," said Sen. Mike Jungbauer, R-East Bethel. "There's some that I would be interested in. Gambling. I hate gambling. But if you put it in the right place, I'd be OK with it."

Jungbauer said the remaining divide between Dayton and Republicans shouldn't be enough to close down government.

"We've seen the general sketch of the landscape of what's going on, what stuff is under negotiation," Jungbauer said. "And I think we're so dang close, if we shut it down I'm going to be really pissed."

As the afternoon crept toward the dinner hour, Capitol visitors got a screeching reminder of the unprecedented moment in Minnesota history.

At 5 p.m., a voice blared through a little-used intercom: "The Capitol is now closed, please make your way to the nearest exit." • 651-222-1288 • 651-222-1673 • 651-222-1210