As the 2011 governor's race picks up speed, Kentucky voters worried about jobs and debt face a fork in the road — the three top contenders offer wildly divergent views about the route to economic prosperity.
Democratic Gov. Steve Beshear is already touting his economic development record, which he says has expanded existing businesses in Kentucky and brought thousands of new ones.
Two Republicans hoping to unseat Beshear suggest that his administration is a big part of the problem and that state bureaucrats need to get out of the way of private businesses trying to create jobs.
But state Senate President David Williams, R-Burkesville, and Louisville businessman Phil Moffett also don't agree on how best to jump-start Kentucky's economy.
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Williams says Beshear's economic development model is "broken," based on an "antiquated tax system and an anti-growth culture in state government."
Moffett advocates a complete scrapping of the state's current tax code and economic development practices.
The issues are both complicated and esoteric, but thanks to the national economic debates on taxes, deficits and jobs, they will get a lot more attention from voters in the coming year, says Stephen Voss, a political science professor at the University of Kentucky.
"It's likely that in the next year, people will know more about how the tax code works," Voss said. "Tax reform and the economy is what people are discussing; they (the candidates) may have an easier time than they ever would before."
No income tax?
While the candidates disagree about the best ways to create jobs and a sounder economy, there is broad consensus that Kentucky has suffered in the economic downturn.
Unemployment is at 10 percent, and state budget shortfalls have led to state employee furloughs and program cuts.
Moffett also points to billion-dollar unfunded liabilities looming in the state's pension funds, as well as state budgets that face routine shortfalls.
"We've never been closer to being bankrupt as a state in our lives," Moffett said in a recent interview.
Moffett says Kentucky's tradition of luring new employers with tax breaks is outdated. Instead, the government should get out of the business of creating jobs and use the tax code to allow private enterprise to do it.
That's why he would eliminate all taxes on incomes, for people and businesses. Instead, he wants to run a smaller state government on revenues from a sales tax that for the first time would be expanded to services such as landscaping, dry cleaning and accounting. All exemptions to the sales tax — including those for food, agriculture and coal — would be cut as well.
Under this plan, state government could shrink, Moffett says. For example, there would be no more need for the Cabinet for Economic Development, and the revenue department could get dramatically smaller.
"No one would be more competitive than we are," Moffett said. "We've entered a new era of government in the U.S. where we can't continue to play favorites in these complex tax schemes to fund the programs we do. We need to make it more clean and clear and transparent, and that's what my tax plan does."
Moffett's plan would keep the sales tax rate at 6 percent, but he concedes it could be tweaked upward to make sure enough money keeps coming in to operate the basics of government.
"At least the citizenry would know how much government costs," he said.
The idea of switching the state's tax burden from income to consumption — taxing people based on how much they spend rather than how much they make — isn't new.
And many people advocate expanding the sales tax to services, because people spend more money on services than goods.
Kentucky taxes just six services, one of the lowest rates in the nation. The state's budget office has estimated the state could bring in $1.6 billion a year by taxing more services. Closing the state's sales tax exemptions could add another $6.9 billion a year to the state budget.
UK economist Ken Troske said Moffett's plan might work on paper — multiplying the state's $150 billion gross domestic product by 6 percent equals $9 billion, which roughly equals the state's annual General Fund tax collection.
But Troske warned that major tax code changes can have unintended consequences.
"I can make the numbers work," Troske said. "Will that attract businesses? Probably. Will it push people out of state to buy more things online or across the border? Probably. There are distortionary effects."
State Rep. Bill Farmer, R-Lexington, has filed several tax overhaul bills in recent years that eliminate income taxes and expand the sales tax to services. But his proposals have continued sales tax exemptions for food, pharmaceuticals and medical services. Otherwise, he said, the taxes could prove too punitive for the poorest people.
"In Moffett's case, he is taxing necessities, so his proposal would be considered extremely regressive," Farmer said. "It will probably be looked at very harshly."
While both Moffett and Williams hope to carry the mantle of Tea Party movement voters who recently elected U.S. Sen. Rand Paul in Kentucky, it's not clear that complex tax code discussions will bring those same supporters in, said David Paolo, a member of the Grassroots Tea Party of Boone County.
"What rings with the Tea Partiers is getting rid of the idea that government officials create jobs," Paolo said. "The idea that to be a successful company you have to go into your local government office and kiss Caesar's ring, that has to go."
Gov. Steve Beshear's time in office shows he thinks the government is a crucial partner in creating jobs. Since Sept. 1, he has sent out 21 news releases touting new or expanded private sector businesses in Kentucky.
Beshear credits many of the new jobs to legislation in 2009 that expanded the Cabinet for Economic Development's ability to offer tax breaks and other incentives to existing businesses in Kentucky, rather than only those looking to move here.
Because of the economic downturn, the cabinet needed "more flexibility to work with existing businesses to grow their businesses and move forward in a difficult economy," said Erik Dunnigan, the Cabinet's acting Commissioner of Job Development.
Dunnigan said House Bill 3 has had significant results: nearly 5,716 jobs created in existing businesses that expanded this year, compared with 3,500 the year before; and 2,400 jobs created in new businesses this year, double the number in 2009.
"Governor Beshear believes nothing is more important than keeping the jobs we already have and creating new ones in every corner of Kentucky," said Matt Osborne, spokesman for the Beshear campaign.
However, Beshear will campaign on the same platform he's had since he was first elected: He is "open to ideas on tax reform that make our state more competitive in attracting new jobs," Osborne said. "However, he believes now is the wrong time to raise taxes on Kentucky families and businesses."
Instead, Osborne said, Beshear will move forward with the success he says has been started with House Bill 3, which was estimated to cost the state nearly $40 million in tax revenue the first year and $60 million in fiscal year 2012.
"Since that overhaul, those new incentives have led to more than 200 projects with a potential investment of approximately $2 billion in the state," Osborne said.
A necessary evil?
House Bill 3 had broad bipartisan support, including a yes vote from Williams. Now, Williams says, tax incentives are "a necessary evil when the underlying economic development model of the state is broken."
In a written statement, Williams said: "In the absence of the leadership of a governor willing to take necessary steps to enact meaningful tax reform, we are forced to use incentives to make up for our state's shortcomings."
Williams thinks the tax system should tilt toward a consumption model but stops short of endorsing Moffett's plan. He would consult with tax experts on the best plan to make Kentucky competitive.
"I think it is rather naïve to apply a one-size-fits-all plan that isn't studied and thoroughly debated," Williams said. "Kentucky needs measured leadership on this issue, and that would mean ensuring that we are doing what's absolutely correct for our state and its people."
Williams said in his 10 years of leading the Senate, the state's corporate license tax was eliminated, personal and corporate income taxes were reduced and some low-income Kentuckians were removed from tax rolls.
As the campaign proceeds, voters will be able to choose which economic plan they think will succeed. But political platforms are a long way from signed laws.
As Scott Lasley, a political science professor at Western Kentucky University, points out, voters have to remember that the governor must work with a Democratic state House and a Republican state Senate. Both houses have opposed large tax reform proposals in the past, if for very different reasons.
"At the end of the day, governors are not dictators," Lasley said. "If you're going to vote on future policy, it's going to be a question of what the candidate can accomplish. That's the part that makes it tough for voters."