DFLers Rep. Paul Thissen, left, and Sen. Tom Bakk at the Minnesota State Capitol on Thursday, June 30, 2011. Legislators and Gov. Dayton failed to reach a budget agreement by midnight Thursday, leading to a state government shutdown. MPR Photo/Jeffrey Thompson

For the past week, the public knew little about where budget negotiations stood between the governor and state lawmakers. Gov. Dayton and GOP leaders established what they called a "cone of silence," so they could talk frankly and openly to each other about the state budget without the details being released to the public.

The cone of silence was smashed Thursday night, as negotiations broke down and the players started to release more details about the offers and counter-offers that couldn't produce a deal.

The two sides failed to reach an agreement on how to close a $5 billion budget deficit in the new two-year budget cycle, which began on July 1. Since a new budget is not in effect, most services funded by the state have been shut down.

A look at the budget proposals shows that both sides were willing to move on their long-standing positions, but they weren't willing to fully give in to the other's demands.

Gov. Dayton offered to drop his plan to raise income taxes on Minnesota's top earners, but only if Republicans were able to find a way to replace the revenue it would raise.

Republicans were willing to increase the overall size of the two-year budget, but only if they could borrow against future tobacco payments and delay more payments to schools.

Your support matters. You make MPR News possible. Individual donations are behind the clarity in coverage from our reporters across the state, stories that connect us, and conversations that provide perspectives. Help ensure MPR remains a resource that brings Minnesotans together. Donate today. A gift of $17 makes a difference.

Republican Senate Majority Leader Amy Koch said Thursday night that the two sides were close to a budget deal.

Republican House Speaker Kurt Zellers and Republican Senate Majority Leader Amy Koch Thursday evening offered a "lights on" bill that would temporarily fund government while a budget agreement could be reached. "The answer to the shutdown is now in the governor's office," Koch said. MPR Photo/Tom Scheck

"There was increased revenue at the table. I would say substantial, aimed at largely in the Health and Human Services area," said Koch. "We knew there was one-time money needed to bridge a gap. And we were willing to go there with the governor, and that's what got us very close to a deal."

But DFL Senate Minority Leader Tom Bakk said the GOP offer also required Dayton and the Democrats to agree to measures like banning taxpayer funds for abortions, requiring people to show a photo ID to vote and banning human cloning -- which would impact medical research in the state.

"When they finally came to the governor with an offer on revenue, they came with a proposal that proposed to borrow $750 million to solve the problem -- contingent upon sweeping policy reforms. A radical social agenda," said Bakk.

Dayton was reluctant to accept the GOP offer, and again pushed for an income tax hike on top earners. But his Thursday morning offer reduced the number of taxpayers who would pay the higher tax. Dayton offered to raise income taxes only on people earning more than $1 million a year or more.

When that plan was flatly rejected, Dayton said he was willing to drop his income tax plan. An aide said he was also willing to plug the remaining portion of the budget hole through a larger payment delay to schools, but only if Republicans agreed to drop the policy matters he disagreed with.

Gov. Mark Dayton announces that a budget deal was not reached just hours before a shutdown was set to start at the Capitol in St. Paul, Minn. Thursday, June 30, 2011. MPR Photo/Jeffrey Thompson

Dayton said he moved back to his income tax hike because another GOP proposal relied on the tobacco borrowing, and the school payment delay. He said he wouldn't accept a plan that didn't include a long-term revenue option.

"Neither was an ongoing source of revenue. Neither was going to fix the structural, chronic problem that we have, and would push things into the next biennium," said Dayton. "We said we would consider one of those, but the other had to be replaced by the millionaire's tax, and that was unacceptable."

By this time, Dayton and Republican leaders were just eight hours away from the midnight deadline. Republicans claimed that Dayton and his DFL colleagues made a political calculation on the tax plan.

Republican House Speaker Kurt Zellers said he believes DFL leaders convinced Dayton to not compromise with the Republicans.

"I don't think Paul Thissen and Tom Bakk wanted to get the deal. They wanted to shut down government for the election," said Zellers. "I think that's where they both are."

But Republicans were making political moves of their own. For weeks, they had been calling on Gov. Dayton to call lawmakers back into a special session so they could pass a "lights on" bill that would continue to fund government and avert a shutdown.

With just four hours until a midnight deadline, many Republican members filed into the House and Senate chambers to show that they were willing to work. DFL House Minority Leader Paul Thissen said Republicans were more interested in playing "mock Legislature" than resolving their budget differences.

"The Republicans are more interested in political theater than finishing the people's work, and that is disappointing," said Thissen.

Dayton told MPR News he doesn't expect budget negotiations to resume until Tuesday. It isn't clear if he and the Republicans will rely on their last-minute proposals as a starting point, or decide it's best to start from scratch.