Politics 2005Week of May 16

Derby Diary

Frankfort, Ky.—S.W.P. (Smarter Wife Who Knows Physics) and I set out to make come true our years-long dream of going to the Kentucky Derby. We were greeted at the Louisville Airport with scores of pots of red roses and bourbon ball chocolates graciously proffered by a lovely lady in mandatory hat and antebellum gown.

From the state Capitol at Frankfort to Louisville’s historic Churchill Downs (on which $117 million had been spent for a facelift before this year’s race), horse racing and politics mix easily in the Bluegrass State. Politicians of both parties talked easily at the Millionaires Row club at Churchill during the Oaks filly races the day before the Derby itself. On Saturday, fixtures from the racing community were as much in evidence as politicians at a black-tie dance May 5 at the Executive Mansion.

A living example of the politics-cum-racing spirit here was Damon Thayer, conservative GOP state senator from Georgetown, Ky., past vice chairman of the state Republican Party and a vice president of the National Thoroughbred Racing Association. A self-styled “political connoisseur,” Thayer has the best of both worlds: Along with his party post and service in the part-time state Legislature, his “day job” with the racing association fulfills his other great love—horses.

Philosophical differences and clashes melted in the 80-degree heat at Churchill Downs. Our group of racing enthusiasts included North Dakota GOP State Rep. Gene Nicholas and his Republican National Committeewoman-wife Connie, both stalwart conservatives, along with Ron Kaufman, RNC member from Massachusetts and Republican stalwart, but not necessarily known as a conservative. Kaufman, already promoting his state’s Gov. Mitt Romney for President in ’08, assured Thayer at a pre-Derby brunch that his doubts about Romney’s conservatism were unfounded and that Romney would be in touch with Thayer.

Importance of Being Ernie (Fletcher)

With the possible exception of upset Derby winner Giacomo, the most-watched figure in Kentucky during Derby week was clearly Ernie Fletcher, who in ’03 became the Bluegrass State’s first Republican governor in 32 years. A practicing physician and U.S. Air Force pilot, Fletcher served one term in the state Legislature and as U.S. representative from 1998-2003 before taking the statehouse. While Republicans are still eight seats shy of a majority in the state House of Representatives, they have their first-in-a-century majority in the state Senate.

So how is Kentucky’s experiment with conservative Republicanism going after nearly two years?

“Actually, pretty good,” said the 52-year-old Fletcher, whom I talked with in his Capitol conference room May 9. After two budget cycles without passing a budget and a $305-million deficit, the Legislature finally enacted a budget that contains, in Fletcher’s words, “about 90% of our agenda—and that includes a strong emphasis on economic development and benefits for small businesses, and lower taxes for both business and individuals.” Specifically, the governor noted, corporate income tax rates were lowered across the board from 8.25% to 6%, and personal income taxes on annual incomes of $75,000 and under were lowered from 6% to 5.8%.

Fletcher also underscored how almost 500,000 lower-income Kentuckians have been taken off the tax rolls under the budget enacted under his aegis. Anticipating my follow-up question—namely, whether it is fair that fewer citizens are paying taxes—Fletcher quickly said: “Look, I agree that all people should pay their fair share of taxes,” adding, “But I also think that lower-income taxpayers are already paying their fair share through property, sales and telecom taxes.” Taking them off the income tax rolls eases the burden on them, he believes, but doesn’t end their responsibilities as taxpayers.

In the most dramatic government reorganization in state history, the Fletcher Administration cut its operating budget, reduced duplicated programs and lowered the number of cabinet-level departments from 14 to nine. Although he conceded that no full agency closed down, with its administrator turning in the key to his office—“You can bet we’d talk about that if it ever happened!”—Fletcher pointed out that his Grace Commission-style reorganization reduced the 37,000-person state workforce by about 1,500 “and saved us nearly $100 million in operating costs and $250 million in Medicaid savings this year.”

As for cleaning up all the red ink (“revenue challenges” is how Fletcher puts it) in which he found Kentucky, Fletcher successfully got through several incentives for state businesses and lures to attract industry as well. These include outright elimination of the corporate license tax and the intangible personal property tax (a tax on investments), both of which, the GOP chief executive strongly believes, were anti-business measures that discouraged industry from coming to Kentucky. Fletcher added that he is now pursuing hybrid production from Japan and, in so doing, is competing against 18 other states (including Michigan and California).

“And because we’re pro-business and pro-jobs, Republicans are always being painted as anti-environment,” he said. “Well, this can be synergistic. We can have an attractive business climate and environmental protection as well.” Along those lines, Fletcher sired the Environmental Stewardship Tax Credit to give tax breaks to businesses that are environmentally friendly.

Is it accurate to say that Fletcher’s budget is a pure, no-tax budget? No, because the advantages given to businesses and individual taxpayers were, in effect, offset by a new 1% tax on lodging (significant in a state where tourism is big), an increase in the wholesale tax on alcohol, and a record increase in the cigarette tax from three cents to 30 cents per pack. As dramatic as this sounds, Fletcher quickly pointed out “the tobacco tax here is still well behind the national average.”

Recalling how U.S. House-hopeful Fletcher was a spirited defender of the tobacco industry when I interviewed him in 1998, he replied that tobacco “is not the driving force in Kentucky that it was.” This is in large part due to the federal tobacco buyout, which, according to Fletcher, “eliminates the last vestiges of Depression-era farm programs” and encourages more of a free-market approach to farming.

But tobacco will still be a factor after the buyout—albeit with “fewer farmers and larger farms,” Fletcher predicted.

Medicaid Mess

So Fletcher got through an agenda with minor tax increases, tax relief and a slightly smaller government. Not bad, but why, I wondered, could he not have reduced the size of government in a major way, cutting the need for as much revenue, and thus get through a budget with no tax increase at all?

“Because we have 695,000 Kentuckians on Medicaid [roughly 75,000 more than children in K-12 schools],” he replied without hesitation. He cited what is increasingly the premier reason states say they are operating in the red. “Each state has different problems with Medicaid and the one-size-fits-all approach isn’t working. With pharmaceutical and health care costs going up the way they are, the time will come quite soon that we won’t be able to pay for the antiquated system.”

Fletcher doesn’t have the solution for the mounting Medicaid crisis, not yet anyway, and there will have to be major statutory changes in the program at the federal level to give states the flexibility to come up with fresh solutions, he says.

“But, we need to get waivers to start experimenting with possible solutions,” he told me. “It’s just like welfare a decade ago. We need pilot programs, and we need the states to experiment. With 50 different laboratories, we’ll find the solution.”

Bluegrass Bulletin

Shortly before Derby week, Fletcher won applause from conservatives for naming former state Republican Chairman Ellen Williams as commissioner of the Office of Local Development. Easily one of the most respected GOP leaders in the state, Williams managed Fletcher’s ’03 election. In her new job, she will direct more than $60 million in grants and $25 million in infrastructure loans.

Williams replaced fellow conservative Darrell Brock, Jr., who resigned to take her old post as party chairman.