AUSTIN (AP) -- Gov. Rick Perry on Tuesday credited spending restraint for igniting the Texas economy but also proposed digging into the state's cash reserves to pay for $3.7 billion in water and road improvements while returning any excess revenue directly to taxpayers.

Perry used his State of the State address to argue that Texas' economic outlook is bright enough that it can afford to cut taxes while spending a major chunk of the $12 billion in the so-called "Rainy Day Fund." Doing so answers calls from the business community to improve the state's infrastructure but signals a dramatic departure for Perry, who spent years building tea party support by imploring the Legislature not to touch the fund.

"Our bank balance is healthy, our economy is growing, our future is limitless," Perry told a joint session of the Legislature.

The longest-serving governor in state history, Perry also ignored calls from Democrats to use the fund to restore $5.4 billion in cuts to public education passed in 2011 amid a $27 billion budget shortfall sparked by a then-sluggish economy.

With unemployment down, state sales tax receipts up and the economy humming, Perry urged lawmakers to cut taxes, saying "providing at least $1.8 billion" over the next two years "is a good place to start."

He also wants to amend the Texas Constitution to allow the state to return tax money it collects but doesn't spend.

"Today, I'm calling for a mechanism to be put in place so when we do bring in more than we need, we'll have the option of returning tax money directly to the people who paid it," Perry said. "Currently, that's not something our constitution allows. We need to fix that."

About 64 percent of state revenues come from sales tax, so it's not clear how money could be returned proportionately. The rest of the revenue comes from the business margins tax and state fees.

The governor skipped some of his signature issues, not mentioning abortion, gun ownership rights or illegal immigration. He vowed again that his state would not expand Medicaid as directed under the White House's health care reform law, but Perry also refrained from his usual Washington-bashing.

He even said "Texas stands ready to do our part" and answer President Barack Obama's calls for unity as he started his second term. That wasn't as big a shift as turning away from his past stance on the Rainy Day Fund, though.

"While we cannot -- and will not -- raid the fund to meet ongoing expenses, we also shouldn't accumulate billions more than necessary," Perry said. "That's why I support a move to utilize $3.7 billion from the Rainy Day Fund for a one-time investment in infrastructure programs."

Forcing the governor's hand a bit is the fact that the fund is nearing a maximum value imposed by the state constitution, after which money begins automatically flowing back into the state budget.

Perry's address made some leading tea party lawmakers uneasy. Republican Rep. David Simpson of Longview said the call to return tax money needs scrutiny.

"I heard the word `mechanism,' that reminds me of force," Simpson said. "Certainly, if we brought in the taxes, it should be used for public purposes. My concern is that I don't want to see more corporate welfare."

Perry also focused on education, calling again for a four-year tuition freeze at state universities while proposing tying a minimum of 10 percent of state funding to the number of students universities graduate. He said it was important to expand university education to South Texas and along the state's border with Mexico saying: "I'm proud that Texas is a place where anyone can make a difference, regardless of where you're from or how you might spell your last name."

Rep. Trey Martinez-Fischer, a San Antonio Democrat who chairs the Mexican American Legislative Caucus, was not impressed.

"Every community in our state has felt the pain of the governor's obsession with harsh budget cuts and so-called tax relief," Martinez-Fischer said in a statement. "The measure that our constituents hold us to is not how big or small government is, but whether it works."

It was the seventh time Perry has given the biannual State of the State. Two years ago, he declared there would be "no sacred cows" immune to deep budget cuts amid an economy still feeling the effects of The Great Recession. Lawmakers responded by slashing funding from schools and many other state services.

"The tough decisions we faced last session tested our resolve and our dedication to the principles that brought us here," Perry said Tuesday.

But Democrats panned the address as willfully blind to the needs of low-income Texans and school districts.

"What I heard was a lot about investing in infrastructure, roads and water, but not enough about investing in people," said first-year Democratic Rep. Gene Wu of Houston.

At one point, more than a dozen protesters with the Texas Organizing Project interrupted the speech from the House gallery. Police arrested James Caldwell of Houston after he shouted "Governor Perry, what are you going to do about the 7 million uninsured people in Texas?" He was handcuffed and jailed on charges of Disrupting a Meeting or Procession.

Republicans drowned out his shouting with a standing ovation for Perry.

"I didn't know there would be that much excitement about tax relief," the governor joked.

(Copyright ©2013 by The Associated Press. All Rights Reserved.)