FRANKFORT — When legislators return to Frankfort in January for a new legislative session, they face a daunting task: how to pay for the state's essential services while revenue continues to decline.
Although official estimates won't be released until next month, initial projections show a $161 million shortfall for this fiscal year, which began in July. And the picture for the next two years doesn't get much better. There could be as much as a $1 billion shortfall for the next two years if the state keeps spending at its current rate of $9.1 billion a year.
While speaking to business leaders in Louisville last week, Gov. Steve Beshear said he has not ruled out any solution — including another increase in the cigarette tax.
Beshear's comments about raising the cigarette tax caught many health advocates and legislators by surprise.
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"We welcome any and all conversations that would bring our cigarette tax higher so that we can reduce the number of people who smoke," said James Sharp, government relations director for the American Cancer Society. The higher that you raise the cigarette tax, Sharp said, the more young smokers quit or don't start smoking.
Yet legislators and even Beshear said last week a cigarette tax increase is unlikely to be approved during the upcoming legislative session, despite the known health benefits and the state's desperate need for cash.
Kerri Richardson, a spokeswoman for Beshear, said the governor realizes fewer teens and pregnant mothers will smoke if the cost of cigarettes goes up. "However, at this time he is not making a specific proposal on the cigarette tax," Richardson said. "The governor wants to impress upon all Kentuckians the tremendous budget challenges that we face in this global recession and the need for every idea and every tough choice to be on the table — from making further cuts to raising revenue."
A new report released last week showed that for the first time since 1994, the number of smokers in the United States increased. And Kentucky's smoking rate — about one in four adults smoke — is still one of the highest in the country.
During last year's legislative session, health advocates pushed for a 70-cent tax increase, to $1 a pack. The legislature compromised and passed a 30-cent increase, bringing the state tax to 60 cents.
But health care advocates say Kentucky could save millions of dollars in health care costs by raising the tax to $1. The more people have to pay for cigarettes, the more likely they are to quit, some studies say. The Campaign for Tobacco-Free Kids estimates that a 50-cent increase in cigarette taxes would generate $130 million in tax revenue for Kentucky. A $1 increase would generate $214 million.
"We continue to say that increase in tax makes the most sense," said Sheila Schuster, a health care advocate. Schuster said many of the people she represents in Frankfort need additional money for the services they depend on. While there have been repeated cuts to services, demand has increased steadily.
"Every human service and health program needs more money, particularly in light of the economy," Schuster said. "The demand for services in mental health and substance abuse is directly related to a downturn in the economy."
But with more than 75 percent of the state's legislators up for re-election next year — all 100 members of the House of Representatives and roughly half of the Senate — any increase in taxes will be difficult to pass, lawmakers said.
"I still haven't gotten any positive feedback on any kind of tax increase," said Sen. Bob Leeper, an independent from Paducah who chairs the Senate Appropriations and Revenue Committee.
Rep. Rick Rand, D-Bedford, chairman of the House Appropriations and Revenue Committee, said the chance that the House would approve another increase in the cigarette tax is "very, very slim."
"We've already hit cigarettes twice in the past few years," Rand said. "And there was a federal tax increase last year on top of the state tax increase."
Beshear will be putting together a potential plan for rectifying this fiscal year's budget crunch in December after the Consensus Forecasting Group, a group of independent economists, releases its revenue projections for this fiscal year and planning projections for the next two years.
But Richardson, the Beshear spokeswoman, said Beshear will not be proposing any broad-based tax increase.
"The governor firmly believes that now is not the time to raise broad-based taxes on working families and small businesses," Richardson said.
On Friday, Beshear's staff asked most state agencies to plan for a budget cut of up to 6 percent this fiscal year. Those plans, which would show how cuts would affect services, are due by Nov. 30.
Rand said he expects the state to cut even more from state agency budgets in coming months. Since Beshear took office in December 2005, budgets have been cut five times.
"I think that the people who are clamoring for smaller government are probably going to get the opportunity to see that," Rand said.
The state also has federal money to help with its looming budget holes.
It already has used $787 million in federal stimulus money to plug an up to $1 billion budget gap. It has $485 million in stimulus money left. Some in Frankfort are hoping the federal government will give states another federal stimulus package in 2010 or 2011, Rand said.
Rep. Bill Farmer, R-Lexington, and Rep. Jim Wayne, D-Louisville, have filed legislation in the past that has proposed very different overhauls to the state's tax code.
But Farmer said he knows a major tax overhaul will not be discussed in the 2010 session and possibly not in 2011.
"There is not the political will to do it," he said.
The state, however, no longer cam get by using Band-Aid measures to fix its fiscal problems.
"We're in this hole for the long haul," Farmer said. "We've got to do something intelligent to get out of it."