INDIANAPOLIS -- A significant tax increase may be inevitable for Indiana residents, according to research from the Indiana Fiscal Policy Institute.

The nonprofit group said Thursday that unless the economy quickly improves or more federal stimulus dollars are pumped in, the Legislature will have to consider a tax increase.

The state could face a $1.3 billion deficit in the next budget year if deeper cuts aren't made or if there isn't drastic improvement in the economy.

The institute hinted that sales tax and income tax would be the most likely targets.

"They're going to have to seriously consider this, and the Legislature will do all it can to avoid it," said John Ketzenberger, of the Indiana Fiscal Policy Institute. "It may get fortunate. We may get that economic expansion. We may get additional federal dollars, but the reality is they're going to have to very seriously consider raising taxes in order to get through this."

The institute said the budget hole is likely to happen if revenue grows at a historical 10-year annual average and if spending is kept at current levels.

Gov. Mitch Daniels has been adamant about not raising taxes. He has not yet commented on the report, but fellow Republicans were not pleased.

"Frankly, I don't like that as an option. I believe the taxpayers aren't making as much today as they were two years ago," said Rep. Robert Behning, R-Indianapolis.

Daniels cut spending by hundreds of millions of dollars, and lawmakers haven't discussed raising taxes in any detail.

More Information: Fiscal Year 2010 Closeout Report