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By Brian Bakst, Minnesota Public Radio News

Gov. Tim Walz dropped his proposal for a higher cigarette tax and recommended that only  some forgiven federal loans be regarded as tax-free as part of a revised budget plan he released Thursday.

Walz also proposed making more people eligible for the Working Family Tax Credit and putting more money into a property tax refund program to benefit renters.

“Minnesotans have met the challenges of COVID-19 pandemic as they always do when faced with hardship—with grit and resiliency,” Walz said in a news release, adding that he wanted to target the help to people and groups most in need of a financial lift.

The adjustments come after state finance officials predicted that Minnesota would have a $1.6 billion surplus instead of a previously forecast deficit in the coming two years.

The latest plan doesn’t account for a windfall coming from the federal government as part of a COVID-19 recovery package approved this month. State officials say they’re waiting for more guidance from the Treasury Department on how and when that money — which could top $2.6 billion — will arrive.

The changes come as the Legislature is ramping up consideration of its own budget proposals. This week, Senate Republicans laid out a $51.9 billion framework for a two-year budget with no tax increases; the DFL-led House will release its broad tax and spending targets next week.

As part of his new plan, Walz would still seek a higher corporate tax rate, but not as much as the 11.25 percent rate he sought earlier.

Walz hasn’t abandoned his call for other tax increases, including a new tier on incomes above $1 million for married filers and half that for single filers. His initial plan submitted to lawmakers in January also sought higher taxes on some investment earnings and large estates passed on after death.

The tax hikes go from $1.6 billion in the governor’s original proposal to about $670 million in the revised plan, according to the governor’s office, while the amount of tax relief goes in the other direction from from $230 million to $1 billion.

For the first time, Walz outlined his position on taxes tied to loan forgiveness in the federal Payroll Protection Program. The DFL governor said he would allow an exclusion of up to $350,000 but not on loan income above that.

About 90 percent of loans were at or below that level, according to the state’s Revenue Department.

More than 100,000 Minnesota businesses received loans last year to keep workers employed during the pandemic; those that spent most of it on payroll had the debt written off. Federal law was changed so the forgiven loans wouldn’t be taxed, but the state hasn’t followed suit yet.

Similarly, Walz proposed exempting enhanced federal unemployment benefits from state taxes to match a federal break. That would waive taxes on up to $10,200 of extra federal benefits people received during the pandemic.

The tax debate will be central to the budget discussion going forward, and some Republicans were quick to criticize the governor’s revised plan.

“Taking money from struggling businesses is indefensible when state government is flush with cash,” House Minority Leader Kurt Daudt, R-Zimmerman, said. “We have billions of dollars available to fully protect workers and businesses from unnecessary tax hikes, and ensure that government is not profiting off relief dollars intended to help Minnesotans.”

Earlier Thursday, the Senate Taxes Committee reviewed bills that would shield more Social Security income from state income taxes in a phased-in approach. Because of the delayed enactment, not all of the impact would be felt in the coming budget.

Republicans say it would keep retirees from moving out of state to avoid taxes, although some Social Security income is already subtracted from tax obligations based on a person’s income.

Eventually, the Senate plan would mean $500 million a year in reduced state revenue.

Sen. Kari Dzeidzic, DFL-Minneapolis, said lawmakers need to consider the tradeoff for the tax cut.

“And what is the impact when we keep shifting this?” Dzeidzic said. “We’re giving the benefit to higher taxed individuals and we’re saddling our students on debt, we’re saddling these working families with child care costs. We do need to balance all that.”

Sen. Bill Weber, R-Luverne, said the impact of well-off retirees relocating goes beyond their tax contributions to the state. They are often community pillars, whom he said are first to donate to charitable drives or volunteer their time.

“So when we chase them out of the state we really change the fabric of our communities and I think that’s an unrecognized cost to our state that many times we don’t take into consideration,” Weber said.