HARRISBURG -- Pennsylvania has collected $723 million more than anticipated in taxes this year, and Gov. Ed Rendell is proposing that the state give back some of the money in the form of tax cuts for businesses and families saving for their children's college education.

Rendell advocates a deeper-than-scheduled reduction in a state tax on business assets known as the capital stock and franchise tax, the bulk of which is shouldered by manufacturers.

The governor also proposes exempting contributions to the TAP 529 college-savings program from the state personal income tax. Earnings in those accounts, used by more than 50,000 families, already are exempt from federal, state and local income taxes.

Mr. Rendell, whose re-election bid is being challenged by Republican Lynn Swann, said the surplus reflects "strategic investments" in the economy, education and the environment during the first three years of his administration.

"We are now seeing record job growth, along with new businesses, increased income and improved profits -- the byproduct of which are state revenues that are more robust than expected," he said in a letter to legislators that was released this week.

About half the surplus is earmarked to cover unforeseen expenses in state programs in the current fiscal year, which ends June 30, and one-quarter of the remainder is required by law to go into the state's "rainy day" contingency fund.

Although the two tax cuts are worth $91 million, Mr. Rendell has earmarked most of the balance of the surplus for government operations in 2006-07. That includes supplementing federal funds for prescription drugs for senior citizens and health care for the poor, filling authorized but unfilled state trooper slots and implementing a new contract for state prison employees.

Some taxpayers also could benefit from the governor's $26 million plan to combat soaring gas prices. It would double rebates for purchases of hybrid vehicles from $500 to $1,000 and authorize weeklong "sales-tax holidays" in May and December for purchases of energy-efficient appliances. School districts would get extra money to help pay for bus fuel.