Gov. Mark Dayton and GOP legislative leaders inched closer to a budget deal on Tuesday, as both sides offered concessions on spending and tax cuts and managed to reach agreement on the first of 10 bills that will make up the state's next two-year spending plan.

The progress was a hopeful sign in negotiations that were stalled in recent days, as the Republican-majority Legislature passed 10 budget bills that the DFL governor quickly vetoed.

The two sides resumed talks Tuesday morning, with Dayton offering to trim the total amount of spending in his $46 billion, two-year budget proposal to accommodate a higher level of tax cuts sought by Republicans. The GOP countered by agreeing to boost spending across several state departments, and to downscale their billion-dollar tax cut package — a signature of the GOP budget plan — to $875 million.

Both parties signed off on the smallest budget bill, covering the state Department of Agriculture and farm-related programs. DFL and GOP leaders also said they were near agreement on another contentious issue, driver's license changes required by the federal "Real ID" law.

But major differences remain on much bigger spending decisions, as well as a series of policy changes sought by Republicans that are incorporated throughout the budget bills. Dayton and House Speaker Kurt Daudt, R-Crown, warned that it's still an uphill battle to wrap up their work in the six days remaining before the Legislature adjourns.

"We've got a long way to go," Daudt said, "and I don't think anybody should assume that because we made a little bit of progress, this is all going to be wrapped up later tonight."

Tuesday's talks set aside policy disputes and focused on numbers. With Dayton willing to spend less and Republicans willing to spend more, the leaders homed in on specific departments' spending — but still emerged with plans that differ by hundreds of millions of dollars. In total, Dayton agreed to shift his proposal by $832 million, while Republicans moved $776 million closer to the governor's plan.

Transportation spending emerged as a major point of contention. After the governor called for increasing vehicle license tab fees to fund more than $321 million in transportation spending, Republican leaders called the idea "unacceptable" — and declined to change their transportation spending plan.

"This will be a significant burden on families," said Sen. Scott Newman, R-Hutchinson, chairman of the Senate's transportation finance committee. "Minnesotans can't afford another tax increase, nor do we need one when the state already has a $1.65 billion surplus."

Dayton and Senate Minority Leader Tom Bakk, DFL-Cook, said they are troubled by GOP plans to use money from the state's general fund — the same pot of money used to pay for schools, public safety and other operations — to pay for transportation projects.

"It's not sustainable in the long run," Bakk said. "People who did that can maybe claim a victory lap and fix a few roads, but they'll come back two years from now" looking for more money.

About 200 transit advocates rallied at the Capitol/Rice Street Green Line stop Tuesday evening to protest cuts in the Republican transportation budget bill to Metro Transit.

The bill, vetoed by Dayton on Monday, would likely mean cuts in transit and Metro Mobility service, according to the Metropolitan Council.

"These are inhumane, unjust cuts," said Jessica Treat, executive director of St. Paul-based Transit for Livable Communities and St. Paul Smart Trips. "They want us to fight over the scraps. We are not going to settle for the status quo."

Transit advocates also oppose a proposed transit hike being considered by the Met Council.

The day's budget talks began with a word of caution from the state's top financial officer, Minnesota Management and Budget Commissioner Myron Frans. He said the state's latest financial update showed an unexpected drop in revenue, largely because the state collected $142 million less in income taxes in April than projected.

Though the state's financial picture can often fluctuate from month to month, Frans warned that the downturn is unlikely to be a one-time blip — and that uncertainty in Washington, D.C., over potential tax reforms or major public works projects could mean more uncertainty for Minnesota. He urged everyone at the negotiating table to consider leaving more money on the state's bottom line.

Dayton said he's keeping that in mind as he works toward a budget agreement.

"My No. 1 priority is to protect the fiscal stability of the state, which we worked very hard to earn," he said. "I'm not going to see that sacrificed."

Staff writer Janet Moore contributed to this report.

Erin Golden • 612-673-4790