Senate Appropriations Chairman Sen. Luke Kenley, R-Noblesville, said the budget deal negotiators reached Thursday helps Indiana improve education, maintain fiscal stewardship and create a good business environment.

"We can win the race among our peers in being a state where people want to be," he said.

Gov. Mitch Daniels had pushed for the taxpayer refund. If it passes the GOP-led Legislature, he could claim that as another legislative victory — in addition to a sweeping education overhaul the General Assembly has already passed — as he considers whether to run for president in 2012.

The taxpayer refund was among the few sticking points between the House and Senate version of the budgets. House Republicans supported the governor's idea, but Republican Senate leaders said it was more responsible to use any excess money to pay down unfunded pension liabilities.

The compromise budget proposal announced Thursday would meld the two ideas together. If state reserves contain more than 10 percent of budgeted spending, half the extra money would be used for pension funds and half would be given back to taxpayers.

The budget would increase funding for public schools by 0.5 percent in 2012 and 1 percent in 2013, and increases funding for full-day kindergarten programs by $47 million over the two-year budget.

It also includes some money that can be awarded to outstanding teachers through the state's new merit pay system that Daniels is expected to sign into law soon. And it includes $4,000 "Mitch Daniels Early Graduation Scholarships" for high school students who graduate a year early and go on to higher education.

Sen. John Broden, D-South Bend, said schools are already struggling from recent state budget cuts. He said the budget's new school formula would leave a "large number" of school districts with less money.

Some Democrats want more funding for schools, but Republicans said revenues expected in the latest forecast may not materialize, and that it's better to keep at least $1 billion in budgeted reserves.

House Democrats suggested a suspension of taxes on gasoline for June, July and August, but that provision wasn't included in the budget deal Republican negotiators hashed out.

Rep. Scott Pelath, D-Michigan City, said budget writers "missed opportunities" to help the working class and put money back into consumers' pockets because they wanted to beef up reserves.

"What is magic about the figure $1 billion?" Pelath asked. "I do understand the tough choices we have to make, but in some cases I think we made some of the wrong tough choices."

The budget also clarifies a way lawmakers can be fined if they boycott proceedings, a direct response to the five-week walkout by House Democrats over labor and education issues earlier this session.

Lawmakers face a midnight deadline Friday to pass a new state budget before the session ends.