PIERRE, S.D. (AP) -- South Dakota legislative leaders said Friday they are working to find a new way to provide financial incentives that would help recruit new large industrial projects, to the state.

In November, voters rejected Republican Gov. Dennis Daugaard's plan to use tax money to provide incentive grants to attract companies to South Dakota, leaving the state without an incentive program for large construction projects, such as manufacturing plants and wind farms.

House and Senate leaders from both parties plan to meet next week to begin discussions on a replacement plan. They spoke Friday at separate news conferences, outlining their priorities for the just-started legislative session, which runs through March.

House Republican Leader David Lust of Rapid City said it's crucial that South Dakota competes with nearby states that offer breaks on construction taxes or other incentive programs.

"It certainly plays a role at the end of a decision-making process when they're deciding between a state that is offering incentives and a state that is not," Lust said.

House Democratic Leader Bernie Hunhoff of Yankton said he does not oppose incentive programs, but doesn't want to finance it with money that would be better spent to support school districts.

Hunhoff said Republicans and Democrats will likely agree on many economic development issues, such as those dealing with college scholarships and workforce training. But the Legislature will have more trouble agreeing on an incentive plan, Hunhoff said, "because it comes down to priorities."

Supporters argue that giving large businesses a break on taxes that apply during construction pays off in the long run because those businesses create jobs and pay other taxes once they are operating.

South Dakota levies a 2 percent excise tax on a contractor's gross receipts for a project, and business representatives have said that puts South Dakota at a disadvantage compared with surrounding states that have no such tax.

For years, the state refunded construction taxes for big industrial projects, but that program was allowed to expire on Dec. 31. Daugaard's plan was to take its place, putting 22 percent of the receipts from the contractor's excise tax -- an estimated $16 million a year -- into a fund could be used for incentive grants.

But 58 percent of voters in the November election rejected the plan after opponents criticized it for using money that should be spent on education and other priorities.

Senate Republican Leader Russell Olson of Wentworth said he supports creating a new incentive plan, and noted that 85 percent of the large projects that got tax refunds in the past were ethanol plants, wind energy and other endeavors related to agriculture.

Among the other priorities for this session, leaders from both parties said they support a plan, outlined by Daugaard in Tuesday's State of the State address, to cut prison spending by treating more people convicted of crimes outside prison walls through intensive probation, parole and alcohol and drug programs.

Democrats said they hope to find extra money for school districts beyond the 3 percent inflationary increase recommended by the governor. The minority party also hopes to win legislative approval for expanding Medicaid to 48,000 additional low-income people under the federal health care overhaul law. Daugaard has recommended against the expansion because of uncertainty whether the federal government can afford to pay its share.

Republicans said they are pleased the Legislature cut spending to balance the budget two years ago rather than using reserve funds, because South Dakota's state government is now in much better financial shape than many other states.

Lust said the Legislature's passage of a state budget in March might be more complicated than usual because that's about the same time President Obama and Congress are supposed to decide how to cut federal spending. If federal support for some programs is cut, the Legislature would have to decide whether to use state money to replace the lost federal funds.


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