INDIANAPOLIS (AP) — Legislative leaders reached a compromise on a sweeping property tax relief and reform plan that they said was headed for a vote either late Thursday night or on Friday — the deadline for adjourning the session.

The deal struck between negotiators for majority House Democrats and ruling Senate Republicans would provide additional property tax cuts for homeowners this year, cap future bills for most property owners, and subject major local building projects to referendums.

The state sales tax would be raised from 6 percent to 7 percent to help pay for the property tax relief, which also would include the state absorbing some major local levies. Those include remaining school operating costs and some child welfare expenses.

The plan would result in homeowners' tax bills this year being cut by 31 percent on average statewide from what they were last year, according to Senate Republicans.

Senate Tax Chairman Luke Kenley, R-Noblesville, said when the plan was fully implemented in 2010, homeowner bills that year would be nearly 38 percent lower on average statewide than they otherwise are projected to be.

"I think the homeowners and the taxpayers are the winners in this exercise," Kenley said.

House Speaker Patrick Bauer, D-South Bend, said it was "a compromise all the way through." It included some provisions sought by Democrats, including an increase in the earned income tax credit for lower-income working Hoosiers, an increase in the renters deduction, and added tax breaks for lower-income seniors.

Republican Gov. Mitch Daniels did not have any immediate comment on the compromise, but he was heavily involved in negotiations that led to the agreement.

He had warned lawmakers that if they failed to pass a plan acceptable to him by the midnight Friday deadline for adjournment, he would call them back in a special session. He said any package must provide immediate, significant and lasting property tax relief and reform.

The compromise legislation included some key components of a comprehensive plan he presented last October. They included statutory tax bill caps, and legislation that would begin the process of amending them into the state constitution so they would be harder to undo.

The homeowner relief this year would be provided by adding $620 million from the increased sales tax revenue to $250 million already allocated for additional homestead credits in 2008.

The tax bill caps would be phased in over the next two years. When fully implemented in 2010, most homeowners' tax bills would be limited to 1 percent of their homes' assessed value, with 2 percent caps on rental property and 3 percent limits on business property. The caps could be exceeded if voters approved major bonding projects through referendums.

The caps are projected to save property taxpayers about $600 million when fully implemented in 2010. But that that is money that schools and local municipalities would not get.

House Democrat leaders in recent weeks have said they shared concerns cited by many educators and local government officials that the caps would result in severe budget cuts and reduced services such as police and fire protection. The plan would set aside $120 million for schools over the next two years to soften the caps' impact on them.

Lake and St. Joseph counties were among a handful of counties that would be especially hit hard, so as part of the compromise, their existing debt would not count against the caps. The resolution that would amend the caps into the constitution would continue to exempt their existing debt from the caps through Dec. 31, 2019.

Beginning next year, the state would absorb all school operating costs, four child welfare levies, local juvenile detention costs, money local governments owe for pre-1977 pension plans for police and firefighters, and property taxes used to subsidize costs hospitals incur treating the indigent.

Taking over the levies could cost the state $2.5 billion or more. They would be funded through revenue from the sales tax increase and using about $2.1 billion the state now pays local governments to keep property tax bills lower.

Democrats from both chambers have expressed concerns that the state might be unable to afford absorbing those costs, especially with the sluggish economy and the hit it has been taking on state tax collections.

"With the numbers that we're seeing in terms of actual collections and the commitment that we're making to assume the responsibilities for those levies, it's going to make budget-making next year extremely difficult," said House Ways and Means Chairman William Crawford, D-Indianapolis.

House Minority Leader Brian Bosma, R-Indianapolis, said the plan retained much of the framework his caucus endorsed at the start of the session. That included tax bill caps, referendum requirements for major bonding projects, and starting the process of amending the caps into the constitution for a vast majority of the state.

"I'm encouraged that there is an agreement," he said. "Am I thrilled with the content of the agreement? No, I'm not, but it does meet many of the standards for success that the House Republicans endorsed at the start of the session."