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Beshear signs tax hike for tobacco, alcohol

FRANKFORT — Drinking booze and smoking cigarettes will get more expensive in Kentucky on April 1.

The governor signed into law Friday an increase in the state tobacco and alcohol taxes after a drama-packed morning in which the Senate's approval of the bill wasn't assured until last-minute closed door meetings between Republican and Democratic leaders.

The measure passed the upper chamber 24-12 shortly after 11 a.m. with no debate before the vote, although many senators rose to explain their positions.

Gov. Steve Beshear, flanked by legislative leaders of both parties, wasted little time in signing the measure at a 1 p.m. ceremony. The increases will double the cigarette tax and apply a 6 percent sales tax on alcohol.

Beshear praised the legislators for "stepping up to do the right thing" in a bipartisan way to help balance this year's budget, which is expected to have a $456 million shortfall.

Beshear and Senate President David Williams echoed other state leaders who have fretted publicly that Kentucky's budget woes only foretell more financial problems in the next fiscal year, which begins July 1, as the economy remains mired in a recession.

Beshear conceded that the tax increases are just a temporary fix and said an overhaul of the state's revenue system is in order.

Williams then urged state and local agencies to pull back on spending in case the economy gets worse.

"Everyone should operate in the foreseeable future on the worst-case scenario as far as revenue," Williams said.

Friday's passage of House Bill 144 enables Kentucky's government to balance its books this fiscal year, which ends June 30.

The alcohol and tobacco tax increases, which raise will $52 million before July, were the centerpiece of a patchwork plan that also included several hundred million in state fund transfers and some cuts to agencies.

The additional tax revenue will enable the state to avoid cuts to key programs, such as school districts, the prison system and the Medicaid program, which provides health care to 770,000 poor and disabled Kentuckians.

State universities will take a 2 percent cut, while other agencies will be trimmed up to 4 percent.

"Some would say this is a tough vote," said Sen. Charlie Borders, R-Grayson and the budget chairman, as he presented the bill Friday. "I would say these are tough times that make this an easy vote."

The Senate vote came after a particularly tense morning in which leaders still were searching for the necessary 23rd vote for passage an hour and half after the session began at 8 a.m.

Williams and GOP Floor Leader Dan Kelly held court with their caucus behind closed doors for nearly an hour before walking across the hall to huddle with Democratic leaders.

They emerged just before 9:30 a.m. and said nothing to reporters, smiling as they strode back to their office.

Shortly before 10 a.m., Sen. Brandon Smith, R-Hazard, said he had decided to support the bill after expressing opposition Thursday. He told the Herald-Leader he did so to prevent cuts to his area's school districts.

"I don't think I'm not being true to my principles," he said at 11 a.m. as he explained his vote on the Senate floor. "This is an extraordinary time."

Democratic Sen. David Boswell, D-Owensboro, also switched his position to support the legislation, as did Sen. Vernie McGaha, R-Russell Springs, who is among the most conservative members of the Senate and who opposed the bill during Thursday's budget committee meeting.

"I make this vote, not because I agree with it, but because it's the only option we have before us," McGaha said.

The bill raises the 30-cent-per-pack tax on cigarettes to 60 cents and doubles taxes on snuff to 19 cents per tin. The tax rate on chewing tobacco increases from 7.5 percent to 15 percent.

In addition, the measure applies the state's 6 percent sales tax to packaged beer, liquor and wine, which primarily have been taxed on the wholesale level, not at the cash register.

The federal tax on cigarettes is also slated to increase 62 cents per pack on April 1. If companies pass the full increases on to customers, the cost of cigarettes will rise 92 cents per pack.

Overall, 12 Democrats and 12 Republicans supported the proposal, which was negotiated among Senate and House leaders and Beshear over the last two weeks. Earlier this week, the measure passed the House 66-34 with six Republicans joining 60 Democrats in support of it.

A companion budget bill, which passed the Senate 35-1, authorizes Beshear to move around several hundred million dollars from various state funds, including $219 million from the state's rainy-day fund, which essentially empties it. Beshear also will have to cut at least $137 million from state agencies, while the legislative and judicial branches will take a combined $10 million hit.

Beshear initially had proposed raising the cigarette tax by 70 cents to $1, but that attracted resistance from many lawmakers.

Once legislative leaders struck a compromise last weekend on a combination of tobacco and alcohol tax increases, Kentucky's beer and bourbon industry mobilized to oppose the bill with rallies, testimony and beer trucks circling the Capitol.

"They put on a full-court press; they took absolutely their best shot," said Sen. Ed Worley, D-Richmond and the Democrats' floor leader. "And I believe they would have won under any circumstances short of a catastrophic budget situation."

Officials with the alcohol beverage industry expressed disappointment with Friday's vote.

Barry Becton, senior director of state government relations at Diageo North America in Washington, D.C., said it's too early to decide whether a legal challenge is necessary to fight against Kentucky's "double taxation" on alcohol at the wholesale and retail levels.

Others applauded senators who voted 'No.' They shook hands and praised Sen. Damon Thayer, R-Georgetown, as he descended the steps from the Senate chamber.

Thayer said Beshear is the third governor during his six-year tenure to deliver a speech about Kentucky's inadequate revenue stream, which is particularly vulnerable during tough times.

"It's like Groundhog Day," he said.

He said later that he favors comprehensive tax restructuring, and that the legislature should use a bill filed by Rep. Bill Farmer, R-Lexington, as a starting point. That bill would eliminate Kentucky's income taxes by spreading out the sales tax to apply to services and real-estate rentals.

Legislative leaders and many rank-and-file lawmakers are now calling for comprehensive tax reforms.

"You hear more talk about it now than you've ever heard before," said McGaha. "I guess if we're ready to roll, now would be the time to try to do something about it, while there's a need."