COLUMBUS (AP) - Ohio would collect $800 million less over the next two years under a tax plan Gov. Bob Taft plans to introduce in his annual State of the State address Tuesday, requiring even more cuts to plug a budget hole already estimated at $4 billion to $5 billion.

''This will be the tightest budget the state has seen in 40 years,'' Taft spokesman Orest Holubec said, but the tax overhaul is needed to make Ohio attract businesses and create jobs - bringing in more revenue in the long run.

With two years left before term limits force him out of office, Taft is working with friendlier legislative leadership this year than in the past, when fellow Republicans controlling the Legislature balked at his plans for school funding, tax code changes and prescription drug coverage.

Taft's speech also will focus on restraining government spending, especially in the state-federal Medicaid insurance program for the poor; bond projects for technology investment and local infrastructure such as sewer plants and bridges; fixing the state's school funding system; and the need to increase the number of college graduates, Holubec said.

A panel Taft created last week announced 18 recommendations resulting from two years of study after the Ohio Supreme Court ruled three times that the state's reliance on property taxes to pay for schools is unconstitutional.

Details will be in the two-year state budget that Taft is to propose on Thursday, plugging holes created by the loss of a temporary sales tax increase, ballooning Medicaid expenses and lower tax receipts. Lawmakers must pass a balanced budget by July.

Taft promised the tightest budget in a decade in 2003, then delivered a plan that the Legislature further trimmed. Holubec said this one would continue cuts such as the past two years' reductions in state vehicles and employees.

Holubec said the governor wants to change Ohio's three taxes that most discourage businesses from locating or staying here: the corporate franchise tax, which is the state's main business tax; a tax on business equipment and inventory; and the personal income tax, which applies to individuals and businesses.

Holubec said the governor will give details in Tuesday's speech, including what tax changes would replace some of the lost revenue. Business leaders are expecting a new tax on overall revenue and increases in tobacco and liquor taxes, but the administration wouldn't confirm if those moves are in the plan.

Lawmakers have said they want the tax overhaul to bring in the same amount of money as the old system, but are more open to Taft's ideas than in past budget battles, said Senate President Bill Harris and Scott Borgemenke, House Republicans chief of staff.

''That doesn't mean we're going to accept everything that's in the plan,'' said Harris, a Republican from Ashland.

Much like President Bush, who shopped his Social Security plan around the country in the days following his State of the Union address last week, Taft will spend Wednesday promoting his tax proposal at factories around the state.

Harris said the administration and lawmakers together can craft a better plan than a constitutional amendment on spending limits proposed by Secretary of State Kenneth Blackwell. Blackwell, a Republican running for governor in 2006, is working to get the amendment before voters either through the Legislature or a petition drive.

''The budget we'll end up passing will go a long way to prove to the citizens of Ohio that there is a new focus, and that focus is limiting spending,'' Harris said.

Blackwell on Saturday praised Taft for targeting the corporate franchise and business equipment taxes. However, he said he remains disturbed that a possible replacement could be a tax on all business revenue - which industry leaders say harms high-volume, low-profit businesses such as agriculture and wholesale merchandise.

Taft also must decide whether to keep a temporary one penny sales tax increase that raised $2.5 billion over the last two years.