Indiana GOP Governor Proposes Tax Hike

Indiana's new Republican governor is doing what he said he would do — laying out the details of his plan to erase the state deficit. But not everyone, including members of his own party, is on board.

When Gov. Mitch Daniels (search) was campaigning, he pledged to balance the budget. But during his first state of the state speech last week, Daniels surprised voters by proposing something he long stressed would be a last resort.

"I ask the most fortunate among us, those citizens earning over $100,000 per year, for one year, to pay an additional 1 percent on the income they receive," he said.

Daniels concedes the proposal startled members of the Republican-controlled Legislature, partly because of his prior employment as President Bush's (search) budget director.

Bush nicknamed Daniels "the Blade" for his budget-cutting skills. Daniels says he is the same man now, but with a different challenge.

"In our state, we have a requirement for a balanced budget. It hasn't been honestly met in years. I think it's time to meet it without gimmicks," he said.

Daniels has inherited a $645 million deficit, a hole he has recommended eliminating in a single year. Sixty percent of the savings will come from cuts on the spending side. The rest of the gap will be plugged by the one-time surtax, he said.

While legislators roundly praise Daniels for pursuing bold reform, many argue a tax increase is wrong.

"When you have one economic class paying for another economic class for all of us, when it should be everyone's responsibility equally, it's class warfare," said state Sen. Mike Young (search), a Republican.

Daniels, however, said he does not think it's "irrational or onerous to ask the most fortunate one in 20 to do a one-time thing."

Briane House, an Indianapolis-area resident who earns over $100,000 as legal counsel to an energy company, agrees.

"Don't go to Starbucks four times a week and you're there. You're not going to miss it," House said.

Under Indiana law, the Legislature must approve the dollar total for a state budget, but has little control over how the money is spent. That's left up to the governor, who has the latitude to shift funds among agencies and even withhold payments to balance the budget.

Daniels, who asserts he will do right no matter the political consequences down the road, said he'll resort to more unilateral methods to finesse the budget if the Legislature does not approve his surtax.

Click in the box near the top of the story to watch a report by Fox News' Jeff Goldblatt.