On economy, Beshear says he has protected Ky. well; Williams says state is being outpaced by neighbors and needs new policies

By Christie Craig
University of Kentucky School of Journalism and Telecommunications

When political forecasters predict the winner and losers of an election, the factor most often considered is the economy. This is typically true for national elections, but economic conditions in Kentucky and the nation make it a major concern in the Nov. 8 election for governor.

Kentucky had the 14th highest unemployment rate in the nation in September, a slight improvement from 11th during 2008, Democratic Gov. Steve Beshear’s first year in office. Beshear argues that his policies have helped Kentucky weather the Great Recession better than most other states.

Republican state Senate President David Williams says Kentucky is being eclipsed by neighboring states and needs big changes in tax policy to make the state the best place in the nation to create jobs. Among other things, he proposes the elimination of the corporate and personal income tax.

Independent candidate Gatewood Galbraith says education is the key to economic prosperity and job creation. He advocates a voucher for high school graduates to be used on books, tuition, and fees for any form of higher education after graduation.

Williams’ plan would assemble a commission of tax and economic experts who would submit a reformed local and state tax system to the legislature. He wants to replace income taxes with what he calls “consumption” taxes, which will likely come in the form of a higher and broader sales tax.

His plan also calls for the elimination or suspension of several taxes, including those on aging whiskey, hay and feed for the horse industry, automobiles (the state portion, not the local), construction-related purchases by businesses, and energy used in manufacturing, processing, production, and transportation and distribution.

Williams opposes income taxes more strongly than he did during the Republican primary, when he told the Lexington Herald-Leader, “A new system should emphasize consumption taxes over income taxes.”

The sales tax in Kentucky is 6 percent.  Items exempt from taxes include food and prescription medications.  Williams believes Kentucky needs to compete with Tennessee, which has no personal income tax, for job creation.  Tennessee has a sales tax of 7 percent (5½ percent on food), plus varying local sales taxes.

While Williams supports big changes in the tax system, Beshear does not, at least for now. “As we are climbing our way out of this recession, I’m not fixin’ to support any broad-based tax increase on anybody,” he said at the Kentucky Farm Bureau forum in July.

The other major element of Williams’ plan is a package of changes affecting labor and business, such as a “right to work” law, which bans union contracts that require employees to pay union dues or fees for collective bargaining. Businesses are attracted to states with right-to-work laws because they weaken unions. Rather than a state law, Williams would allow counties to enact local right-to-work laws by referendum, something done in no other state.

Likewise, he would also allow counties to vote against being covered by the “prevailing wage” law, which sets generally union-scale wages for public construction projects costing $250,000 or more. 

Beshear took office in December 2007, about the time the economic downturn began. In 2008, he got the legislature to expand the state’s tax-incentive programs for creation of jobs. From 2008 to 2011 state press releases named 120 companies that promised to create jobs with the incentives. CN2’s news service, Pure Politics, surveyed them and got a response from 87. The initial estimation of those to be hired was 11,786, but the verified number of those hired was 3,691, less than a third of the jobs originally promised.

Beshear has assured taxpayers that state tax incentives will not be delivered to these companies unless they deliver jobs, but he continues to say that the incentives have created 19,500 jobs.

Beshear points out that USA Today ranked Kentucky fourth in overall personal income growth in 2010; that the state jumped 12 spots in Forbes magazine’s ranking of best places to do business; that its business tax climate was ranked 19th in the nation by the National Tax Foundation, an improvement of 15 spots since 2009; and that the credit rating agency Moody’s predicted Kentucky will have one of the five highest job growth rates in the coming year. However, Moody’s and another rating agency recently lowered Kentucky’s credit rating.

According to the U.S. Department of Agriculture’s Economic Research Service, every county in Kentucky county but one gained jobs from the second quarter of 2010 to the second quarter of 2011, a distinction achieved by no other state. The only county that did not gain jobs was Williams’ home Cumberland County.

Williams prefers to compare Kentucky with neighboring states, which he says are outpacing Kentucky, and cites the testimony of Mike Mangeot, head of the Kentucky Economic Development Association, on right-to-work laws.

Mangeot, who represents local economic developers, was asked how Kentucky could improve its competitiveness with Tennessee and other Southern states. He replied, “Right-to-work, honestly. I can tell you it keeps us from the table, period.” He added, “The personal income tax hurts us especially when dealing with the other seven states that don't have that."

In one of his television ads, Williams accused Beshear of losing nearly 100,000 jobs. Most of that loss has been recouped. The ad, and more recent ones from Williams and a supportive group, also cites a report calling Kentucky the worst managed state. That label came from a website that looked mainly at long-term trends in the states, such as education and poverty rather than short-term factors influenced by the current administrations, such as the lower credit rating.