Despite a marginally improved economic forecast, the political battle to solve MinnesotaâÄôs remaining projected $5 billion budget shortfall rages on.

Federal government action largely reduced the previously estimated $6.2 billion deficit for the next biennium, according to the state economic forecast released Monday.

The new shortfall includes a $264 million improvement in state funds this biennium over the November budget forecast, and an $896 million revenue increase in the 2012-13 budget cycle.

Minnesota Management and Budget Commissioner Jim Schowalter said he was “pleased to present modest improvements” in the stateâÄôs fiscal projections, but stressed that the gains donâÄôt mean MinnesotaâÄôs budget crisis is over.

Federal tax policy, including a reduction in payroll taxes and a delay in a federal capital gains tax increase, helped the state realize unanticipated revenue this biennium.

Also included is a $165 million reduction in Health and Human Services spending because Gov. Mark DaytonâÄôs early Medicaid opt-in began later than previously thought.

Dayton, who just returned from a governorâÄôs association conference in Washington, D.C., called the forecast “both good news and bad news.”

Political, policy effects

The political and policy ramifications of a smaller shortfall are immediate.

Dayton revised his proposed budget to exclude an income tax surcharge that would have brought in $918 million biennially and made Minnesota the highest taxed state in the nation. He would also limit about $200 million in health and human services cuts to low-income health care programs and nursing homes.

Proposed state cuts to transit funding, which spurred debate about increasing fares, would be rescinded.

Higher education wasnâÄôt afforded the same generosity.

DaytonâÄôs proposal cuts $171 million from higher education, including roughly $100 million from the University of Minnesota over the next biennium.

“I wouldnâÄôt like to make any cuts to higher education,” Dayton said, but he added that he had received a lot of feedback about the pain reductions in nursing home funding would bring.

“The University needs to take its medicine, and weâÄôre prepared to do so,” University President Bob Bruininks said. “But I hope that lawmakers in St. Paul will get together and find a way to compose their differences so this $[5] billion problem âĦ is not solved purely by budgetary reductions.”

Dayton praised President Barack ObamaâÄôs December tax compromise and other federal government action for the cheerier forecast.

The GOP leadership floated the idea of using the $1.2 billion leeway to propose tax cuts in addition to those already on the table. Senate and House leaders largely credited businesses with improving the stateâÄôs economy.

“This is a message that no one in government should pat themselves on the back,” GOP House Speaker Kurt Zellers said, asserting that the private sector was the engine behind the growth.

“It was a good, better number,” Senate Majority Leader Amy Koch said of the reduced deficit, but added that “it doesnâÄôt really change the priorities.”

Since the legislative session began, Republicans have stressed private sector job growth, reduced spending and forcing government to live within its means.

The news will help make their job easier, Koch said, but it doesnâÄôt reflect a “game changer.”

Republican proposal absent

Republicans havenâÄôt released a budget proposal for the 2012-13 biennium, although they set a March 25 goal to get their version of the legislation through both tax committees.

Dayton ultimately vetoed a previous GOP measure aimed at reducing MinnesotaâÄôs then-$6.2 billion deficit by cutting about $900 million in state spending. RepublicansâÄô no new taxes mantra means a full budget will come with large spending cuts and some government reform, despite indications that it could once again face a veto.

Dayton released his proposal in mid-February. It includes about $3.2 billion in new revenue, not including the now-defunct surtax, by adding an additional income tax tier at 10.95 percent, closing certain tax loopholes and health care surcharges. The plan also includes $765 million in spending cuts, not including some increases.

“I wouldnâÄôt support my bill if I didnâÄôt have to,” Dayton said of the mammoth tax increases included in the proposal.

DFL and GOP dodges

DFL minority leadership remained hesitant to lend their full weight to DaytonâÄôs proposal, although both the House and Senate minority leaders said they wouldnâÄôt submit their own budgets.

“I think we have always said we conceptually support the values in [DaytonâÄôs] budget,” House Minority Leader Paul Thissen said, but he and Senate Minority Leader Tom Bakk refused to outright endorse the specifics of the proposal.

At one point, Bakk asked reporters to move on from the question.

GOP leaders matched their partners across the aisle with a dodge of their own.

Tom Stinson, the nonpartisan state economist, said DaytonâÄôs proposal âÄìâÄì a mix of tax hikes and cuts âÄìâÄì would be slightly better for MinnesotaâÄôs economy than $5 billion in reductions.

Both Koch and Zellers gave roundabout responses to repeated questioning on StinsonâÄôs assertion, focusing their answers on structural improvements, reform efforts and spending cuts.

Pessimistic on employment

Republicans latched onto the lackluster job growth included in the forecast. They reiterated their belief that tax cuts and government stability would lower unemployment numbers.

The national unemployment rate will remain above 7 percent into 2014, according to the state report.

“Tax relief plus certainty equals economic growth,” Deputy Senate Majority Leader Geoff Michel said.

Dayton took the job numbers as a sign to promote his proposed $1 billion borrowing bill, which he says can create 28,000 jobs through infrastructure improvements.

But state economic experts warned that the current financial projection was based on some very volatile premises. Revenue increases from capital gains taxes, which come from stock market earnings, are often hard to predict. Also, the forecast was completed before unrest in the Middle East began spiking oil prices.

As previously projected, structural budget problems plague Minnesota into future biennia. The current estimated shortfall for the 2014-15 budget cycle is about $4.4 billion.