Gov. Mitch Daniels said the state could be on the verge of the largest tax cut in Indiana history Thursday night, speaking to a crowd in Kokomo the same day the Indiana General Assembly reached the halfway point in the legislative session.

In an 90-minute public forum, Daniels repeated his mantra that spending — particularly local spending — has been outpacing the growth of Hoosier incomes for years.

His property tax reform proposal — increasing the sales tax from 6 percent to 7 percent and using part of the state’s surplus for tax relief — is only part of the solution, he warned.

“There are no villains. There are no bad guys in this play. I think there are a lot of good people in a flawed system,” Daniels said. “The question can no longer be how much does the government think it needs. The question is how much the taxpayer can reasonably expect to pay.”

That statement drew applause from the audience of about 400 at Oakbrook Community Church, one of numerous venues the governor has visited in recent weeks, taking question after question about his tax relief plan.

As it has been consistently, Daniels’ message pegged local spending as the prime culprit behind recent property tax increases, a contention which hasn’t met with universal agreement among local officials.

But the cornerstone of his plan for introducing caps on property tax bills — 1 percent for residential, 2 percent for rental and 3 percent for business — has already survived amendments in the Democrat-controlled Indiana House, and Tuesday, Daniels said he’s more than pleased with the progress made so far.

In making that point clear, Daniels also took time to defend his ideas during answers to a series of questions posed by the Kokomo-based tax reform group Citizens United for Tax Reform.

On the issue of whether all property should be taxed equally, Daniels said “speaking for myself, I don’t have any problem giving specific protection to home ownership.”

“When people talk about the American Dream, people put [home ownership] in there somewhere at the very center,” he said.

On CUTR’s assertion about 30 percent of Indiana residents rent, and won’t receive any direct tax relief in return for paying higher sales taxes, Daniels noted that the federal tax code also favors home ownership over renting, “maybe too much,” he added. That’s part of why he proposed a lower property tax cap on rental properties, he added.

Daniels also wasn’t hesitant to address the issue of greatest importance to many of CUTR’s members, whose next public forum will feature conservative activist Eric Miller, a proponent of complete property tax elimination.

While Daniels didn’t entirely discount the elimination idea, saying “meaningful limits on local spending could [eventually] bring elimination into the conversation,” he said his more important goal is acting on property tax relief “right now.”

“Plans to eliminate property taxes didn’t help anybody for four years,” Daniels said. “And to those who favor elimination, I’d say be careful: If you push forward with something that can’t work, you risk discrediting the entire goal of elimination, particularly if it gets in the way of real reform this year. Don’t let the perfect be the enemy of the good.”

Daniels said he thinks the Legislature has been given enough guidance on what he won’t accept from a final reform package that he was hesitant to use what he referred to as “the V word,” when asked what he might veto.

“I would veto a bill that doesn’t have a clear element of permanence to it,” Daniels said, but he steered clear of the controversy in the Statehouse Wednesday, when House Democrats refused to hear a proposal to amend the state’s constitution to include permanent property tax caps after House Republicans submitted several amendments to the bill, including one calling for a constitutional ban on gay marriage.

Instead, he stayed close to the topic of local government reform, speaking in favor of the Kernan-Shepard plan’s call to reform county government in the executive model of city government, with a single, mayor-like county executive responsible for appointing key positions, and a county council responsible for the budget.

But Daniels said that’s a subject he’d like to address next year, after considerable study and consensus building. He said he thought the mayoral system encouraged “accountability.”

“I congratulate the mayor,” Daniels said, pointing to Kokomo Mayor Greg Goodnight in the audience. “But with the congratulations comes the burden on your shoulders. The mayor’s a tough job. Everyone knows where you live, so to speak.”