COLUMBUS (AP) - Overhauling the tax system that Ohio uses to pay for everything from schools to hospital care for the poor dominated Gov. Bob Taft's seventh State of the State address Tuesday.

The noon address, the second to last for the two-term governor, was planned as a series of proposals for updating the state's tax code, a Depression-era system that continues to focus on goods while the state's economy is increasingly services-based.

Taft, 63, tried to change the tax system two years but was stymied by lawmakers who balked at the price tag and felt they weren't consulted early and often enough.

This year, Taft, House Speaker Jon Husted and Senate President Bill Harris - all Republicans - agreed to make tax changes their top shared priority.

In his speech, Taft proposed cutting the rates on personal income taxes, paid by individuals and businesses, by 21 percent across the board. Ohioans who make less than $10,000 a year would pay no state income tax, he said.

He also proposed changing the way Ohio taxes businesses, saying the state's high rates scare off prospective companies.

''But because of aggressive and creative accounting, our collections are low compared to other states,'' Taft said in prepared remarks. ''Some larger companies that can afford high-priced lawyers and accountants don't pay a fair share, while smaller companies pick up most of the tax burden. That's just not right.''

In his speech, the governor proposed phasing out the tax on businesses' equipment and inventory, which companies have long said makes the state unattractive to firms wanting to relocate here or expand.

In 2003, the tax raised about $1.8 billion for local governments such as schools and libraries, according to the Department of Taxation. Taft said his plan would protect schools and governments from their losses for a while.

He also proposed replacing the state's corporate tax with a tax on all commercial activity. That tax would have a low rate but a broader base, meaning it's applied to more types of businesses.

''We'll all hear the chorus of complaints from the special interests who feel threatened by change,'' Taft said. ''So we must have the courage to prevail. We must remain committed to the very end.''

Taft also:

4Asked for support in bringing a proposal to the November ballot to continue funding his Third Frontier Project. Voters rejected a $500 million bond issue in November 2003.

4Announced a new program to provide more than $100 million in low-interest student loans to Ohio students and proposed expanding eligibility of the state's needs-based college grant program to an additional 11,000 students.

4Said his budget to be introduced Thursday will cap college tuition increases at 6 percent, to be exceeded only for the purpose of funding needs-based scholarships.

Taft's tax plan will raise about $800 million less over the next two years, meaning he'll look for savings by reducing spending on the state's Medicaid program and keeping budgets tight at most agencies.

This is a far different approach than 2003, when the governor proposed a plan that would update the tax system and close loopholes but would also increase taxes by more than $2 billion over two years.

In a sign that the business community may be more supportive, Ohio manufacturers planned a series of radio ads beginning Tuesday to raise public awareness about the need to update the tax system.

''We share the governor's belief that the current tax code discourages and penalizes investment in the state,'' Randy Leffler, a spokesman for the Ohio Manufacturers' Association, said Monday.

Democrats, in the minority in the House and Senate, were taking a dim view of the details emerging about Taft's tax proposals ahead of Tuesday's speech. They said reducing the personal income tax would put more of the tax burden on the middle class.

''Is it really the time to be considering a tax cut for millionaires when we are eliminating health care for Ohio's poorest, most vulnerable citizens?'' said Rep. Chris Redfern of Port Clinton, the top-ranking House Democrat.