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Published March 08, 2013, 12:27 PM

Dayton ready to drop Minnesota sales tax overhaul

ST. PAUL, Minn. (AP) — Gov. Mark Dayton said Friday he was almost certain to drop his bid to broaden Minnesota's sales tax, depriving him of the main new revenue source in his budget and putting other priorities at risk.

By: BRIAN BAKST,Associated Press, Associated Press

ST. PAUL, Minn. (AP) — Gov. Mark Dayton said Friday he was almost certain to drop his bid to broaden Minnesota's sales tax, depriving him of the main new revenue source in his budget and putting other priorities at risk.

In a telephone interview with The Associated Press, Dayton described himself as "99.8 percent certain" to abandon a plan to make a range of services — from lawyer bills to haircuts — subject to the sales tax. A proposed sales tax on clothing priced above $100 was also likely to go.

He had hoped to use extra money from the expanded tax base to cut the sales tax rate and also pay for a property tax break for every homeowner. In the budget plan Dayton released in January, he recommended taxing more things but dropping the underlying sales tax rate from 6.875 percent to 5.5 percent.

Dayton told a suburban chamber of commerce earlier Friday that a business-to-business tax on services was surely gone. He said later to the AP that he doesn't want consumers to shoulder the new tax load and leaving businesses out would be unfair.

Dayton is rewriting his budget after a state economic forecast trimmed Minnesota's projected deficit by more than 40 percent to $627 million for the next two years. But the move to jettison the sales tax is as much a response to its unpopularity, he acknowledged.

"I heard an outpouring of opposition from business people all over the state. They're very important to our state and to me," Dayton said. "I listened."

He told the AP he wants one more chance to look over the numbers in a meeting with top advisers set for Saturday. He plans to detail other revisions to his budget proposal Tuesday.

House Speaker Paul Thissen commended Dayton for moving away from proposal many in his own party considered problematic. Thissen, a Minneapolis Democrat, said he didn't expect Dayton's sales tax plan would have survived the House.

"It's really refreshing to have a governor who is willing to work together and listen to the concerns of Minnesotans and legislators," Thissen said of his fellow Democrat.

The governor was aiming to raise more than $2 billion over the next two years by taxing services, and banking on the expansion to pay for other program spending and tax breaks

With fewer dollars, Dayton conceded that he'll have to scale back other ambitions. Chief among them could be his proposed $500 per homeowner property tax rebate, which would have cost $1.4 billion.

"Removing the sales tax expansion removes significant amount of revenue that could be used for lowering the sales tax rate and the property tax rebate, he said.

Dayton said it also jeopardizes some proposals that are favorable to business, including a reduction in the corporate income tax rate and a freeze on business property tax increases.

The governor said he is standing behind his plan to raise income taxes on the wealthy by adding a new fourth bracket to the tax code, as well as his proposal to hike cigarette taxes by 94 cents a pack.

Legislative Democrats, who hold both House and Senate majorities, have embraced the idea of imposing higher taxes on incomes above $250,000 for couples and $150,000 for single filers. They said they hoped business leaders would drop their resistance and see that tax as a way to raise more money for public schools, college aid and other things meant to foster a more competitive workforce.

But Republicans believe the income tax is the next front in their fight to sink Dayton's budget.

Senate Minority Leader David Hann, R-Eden Prairie, said the business-to-business sales taxes may have been the focus until now, but the income tax hike will get more attention.

"These things are additional burdens on an economy that is already struggling," Hann said. "We don't think additional taxes are helpful."

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