A Senate Finance subcommittee scuttled House plans to refinance tobacco settlement bonds to pay for Medicaid programs and rejected a tax trade-off Gov. Mark Sanford sought.

Instead, the subcommittee late Wednesday approved a plan to increase cigarette taxes by 53 cents a pack, up from 7-cents-a-pack - the third lowest in the nation. That plan also decreases sales taxes on groceries by a half-cent each year. In nine years, the grocery sales tax would be a penny on the dollar.

The Senate Finance Committee is expected to take up the plan Tuesday, which would still have to be approved by the full Senate and then go to the House. Leaders there oppose increasing the cigarette tax.

The subcommittee plan would raise about $150 million for Medicaid programs. The federal government would send the state three dollars for each state dollar, meaning about $450 million could be put into Medicaid programs, said Sen. Wes Hayes, R-Rock Hill. "It would certainly give us a strong, recurring source of funds for the Medicaid programs," said Hayes, the subcommittee's chairman.

Supporters of the House's tobacco bond plan said it could generate as much as $45 million for Medicaid programs in the first year and $36 million a year later.

"I think it would just put too much risk on the state to refinance those bonds," Hayes said.

Observers worry tobacco companies won't be able to make tobacco lawsuit settlement payments. Those fears increased this week when cigarette maker Philip Morris said if it had to post a $12 billion bond that an Illinois state judge required it to appeal another case, it could not afford its share of the national settlement payment.

South Carolina sold bonds two years ago that will be paid off with the cigarette settlement. The state has no risk with the bonds. If the settlement falls through or the tobacco companies go under, the state is not on the hook to repay the bonds.

The House plan would again leave the state dependent on those payments, Hayes said. "It was much too risky to get back into that business," he said.

House Ways and Means Committee Chairman Bobby Harrell supports the bond refinancing plan. At the same time, "most of us in the House are not interested in raising taxes," said Harrell, R-Charleston. "While we do like the reduction of the food tax and would be willing to support that, we are not interested in raising taxes."

The grocery sales tax initiative isn't new. Three years ago, the Legislature began a rollback on grocery sales taxes. A penny was dropped from the tax for more than a year. But former Gov. Jim Hodges vetoed the break two years ago.

Sanford's proposal paired a 53-cent cigarette tax increase with a reduction in income taxes beginning in 2004. Sanford and more than a third of representatives and senators have pledged not to raise taxes.

"We're trying to accommodate the governor and those who want to make sure we don't have a net increase over time," Hayes said.

The grocery sales tax reduction matches the amount generated by higher cigarette taxes in the 2008 budget year. Sanford's plan would have reached that trade-off level in about three years, he said.

While still early in the process, Sanford "has said from the beginning that there has to be a corresponding decrease in exchange for any increase in the cigarette tax for him to sign off on it," Sanford spokesman Will Folks said. Sanford is in Alabama finishing two weeks of Air Force Reserves training.

"We think it's critical to tie that to tax relief where it is going to have the greatest impact on our economy. Clearly that's income tax relief," Folks said.

But Senate Finance Committee chairman Hugh Leatherman, R-Florence, says "the tax on food is one of the most regressive taxes we have."

However, people making just $12,000 a year pay the state's top income rate of 7 percent, Folks said. "Anything we can knock off that puts more money in people's pockets," Folks said.