(Host intro) Governor Jim Douglas gave his State of the State address this afternoon, and we have two reports.

First, the Governor's speech: Douglas proposed lowering Vermont's income tax rate.

As VPR's Bob Kinzel reports, the Governor wants to pay for the proposal by removing exemptions for the state's capital gains tax.

As part of that effort, he said he would strongly oppose all efforts to increase taxes and he outlined a plan to cut the state's income tax rate.

Several years ago, Douglas proposed eliminating the so-called capital gains tax exemption but the Legislature never adopted it. This provision exempts 40% of all capital gains from state income taxes.

Douglas proposed the plan once again and dedicated the new revenue to help lower income tax rates for all people:

(Douglas) "What this means is that a working man or woman in Vermont making 50,000 dollars a year pays nearly 50% more tax than someone who does not work and simply lives off investment or trust fund capital gains income in the same amount. Our state is one of only a few that has such an unfair penalty for doing an honest day's work. This is grossly unfair. We must close this loophole and eliminate the working tax penalty."

Several weeks ago, Douglas proposed leasing the state lottery to a private company as a way to generate new revenue to reduce the statewide property tax rate. Douglas says the state would get a one time payment of roughly 50 million dollars under this proposal.

The idea has been strongly opposed by Democratic leaders because they don't want the state to rely more heavily on gambling revenues. Douglas asked them to give it a fair hearing:

(Douglas) "I recognize that my proposal to lease the state lottery is generating much discussion but the need for property tax relief is acute and taxpayers expect us to find ways to optimize state government and return those savings to them."

Douglas also urged lawmakers to control health care costs by making more investments in medical information technology and by creating a state reinvestment pool for people with high deductible policies:

(Douglas) "With so much common ground among us, so many areas of agreement, and the financial security of so many families at stake - we must make progress this year. I therefore request that this Legislature make affordable health care the top priority and send me a bill before Town Meeting."

A group of anti war protesters interrupted Douglas's speech at one point. They had two main issues.

They called on Douglas to oppose recruitment by the military at Vermont High Schools and they urged the governor to oppose any future funding for the war in Iraq.

The protesters were escorted out of the House Chamber by Statehouse security officers following their brief demonstration.

For VPR News I'm Bob Kinzel in Montpelier.

AP Photo/Toby Talbot