In a 159-156 vote in the Riksdag, the left-of-centre opposition parties, with the help of the Sweden Democrats, stopped the right-of-centre government's plans to raise the salary cut-off point after which Swedes must pay state tax, which is imposed on high earners.
The opposition's successful bid to stop the legislation was welcomed by the Social Democrats.
"I think it's a good decision that the state is not choosing to go further and borrow to finance huge tax cuts for those who earn the most," MP Mikael Damberg, who heads his party's parliamentary group, told the TT news agency.
"I think the Swedish people feel it's now time for something else and that this money is going to be needed elsewhere, not least for schools."
The controversial tax cut would have raised the threshold for paying state tax so that it only covers those who earn 36,000 kronor ($5,530) or more per month. The government calculated that the change would lower the tax bills of roughly one million Swedes.
The tax cut prompted a constitutional row over whether or not the planned cuts, which were included in the government's extensive budget bill rather than as a separate piece of legislation, could be scrapped without an alternative budget bill being presented.
While the government argued that Sweden’s parliament is obliged to either accept the government’s budget as a whole or to propose an alternative budget for which it can get a majority, the opposition argued that the rules allowed for certain items in the bill to be vetoed, as long as it wouldn't adversely affect state finances.
Liberal Party (Folkpartiet) MP Carl B. Hamilton expressed his concern about what the vote might mean for future budget bills.
"What's important isn't that the tax cut was rejected, rather that we've now broken a budget precedent and opened ourselves up for the risk that in the future, political parties will pick and choose what they like and don't like out of future budget bills. That's a slippery slope," he told TT.
"Budget negotiations aren't for romantics. It's a rather ugly free-for-all. I think the temptation for future oppositions is going to be quite large."
Hamilton added that all political parties ought to sit down together during the next session of parliament to clarify the Riksdag rules so that the same situation doesn't occur again.
The tax cut would have kept a few hundred more kronor per month in the bank accounts of those who earn more than 36,000 kronor. Now the threshold for when someone must pay the state tax remains in place and the tax will remain at the same level as 2013, save for a small indexing adjustment.
The Riksdag agreed earlier in the autumn to accept the government's budget framework. But when the opposition parties' proposal to tear up the tax cuts was presented last week, the Speaker of the Riksdag Per Westerberg of the Moderate Party refused to allow a vote on the matter, arguing that it violated Riksdag rules.
On Tuesday, the parliamentary committee on constitutional affairs (Konstitutionsutskottet - KU), where the opposition parties have a majority, voted that the Riksdag speaker was wrong to prevent the matter from coming to a vote.