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Governor Dayton and DFL legislative leaders have announced a deal on an overall tax bill that would increase roughly $2 billion in new taxes.

The plan would create a new fourth tier income tax rate of 9.85 percent on couples with an after-tax income of $250,000 a year. The nonpartisan Tax Foundation says Minnesota would have the fourth highest income tax rate in the nation under the new proposal.

The plan would also increase cigarette taxes by $1.60 a pack and increase some corporate taxes. The plan scraps proposals to raise alcohol taxes and an income tax surcharge on couples earning more than $500 thousand a year. DFL House Speaker Paul Thissen says House Democrats dropped their push for the income tax surcharge to pay back an $800 million K12 school payment delay.

"It became clear that some of the discomfort of the additional tax needed for the surchage to fully pay back our schools was growing," Thissen said. "That will no longer be part of this tax proposal."

Current law says any surplus money should from future budget forecasts will pay back the school shift first.

DFL Senate Majority Leader Tom Bakk says the agreement paves the way for the Legislature to pass a budget before Monday's constitutional deadline to adjourn.

"This is the lynch pin of the session," Bakk said. "Now everything will fall in under the tax bill. We are well on our way and I would argue ahead of schedule to accomplish the completion of the tax bill on Thursday."

DFL legislative leaders say the tax hikes are needed to erase a $627 million budget deficit and spend more on education, property tax relief and other state programs.

Republicans were quick to criticize the tax deal as unnecessary.

"We've got a $600 million problem," said GOP Senate Minority Leader David Hann. "We don't need to raise $2 billion in revenue to solve a $600 million problem."

Lawmakers are also wrapping up other budget bills. A joint House/Senate conference committee on Higher Education has finished its work. DFL leaders also say a conference committee on Health and Human Services is close to finishing as well.

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Tom Scheck

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The new income tax rate would make MN the fourth highest in the nation.

VIDEO: Tax deal reached

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