By Charles Wolfe
The Associated Press

FRANKFORT - Gov. Paul Patton on Wednesday proposed to a somber General Assembly a budget based on a $570 million tax increase. He said the alternative would be to cut teachers, hike college tuition and resume setting inmates free from prison.

"If that is to be the future of Kentucky, it will be your legacy, not mine," Patton said, suddenly choked with emotion. He encouraged a statewide television audience to judge for itself after reading his plan, which was posted on a state Web site.

Patton, a Democrat whose term ends in December, gave his 50-minute budget address knowing that leaders of both chambers had already declared the tax plan doomed. Earlier Wednesday, Rep. Joe Barrows, the House majority whip, said Patton's speech would be "irrelevant to the work we have to do" in the 2003 session, which is constitutionally limited to 30 days.

Patton acknowledged the opposition, even with the prospect of a $400 million shortfall in the coming fiscal year.

"They don't see any support for it now," Patton told reporters. "I understand that; don't expect there to be any. May never be any."

If not, Patton said, the legislature has an "obligation to put together a realistic budget, making the cuts line item by line item" to make it fit within existing revenues, then subject it to public hearings.

"That's not my solution. I know what it looks like," he said. "I'm against it, going to oppose it, not going to sign it."

He did not say he would veto it. "I'm going to reserve judgment on that," Patton said. A bill becomes law without the governor's signature unless it's vetoed.

Patton is proposing a budget solely because the House and Senate failed to enact one during their 2002 session.

Kentucky operates on biennial budgets. The legislature's off-year sessions were not designed for budget action.

But when the new fiscal year begins July 1, all budget reserves will be spent, Patton said. "I will then have no choice except to make cuts that will upset more people than the early release of felons" - a reference to nearly 900 prisoners already turned loose, two of whom were later charged with bank robbery and rape.

Patton said the legislature will have to restore the revenue lost through dozens of tax cuts in the boom years of the '90s. Otherwise, "we reduce the teachers in our classrooms or increase college tuitions or cut more people off Medicaid or let more felons out of prison or reduce our services to neglected children or let the weeds grow in our state parks," Patton said.

Patton has been operating state government since July 1 on a "spending plan," the legality of which is being challenged by Williams in Franklin County Circuit Court.

As expected, the bulk of Patton's proposed tax increases would be borne by businesses. A "business activity tax," based on sales and payroll, would replace the corporate income tax, which has been declining as a percentage of total state revenues since 1990. The administration estimates the change would generate $340 million in the fiscal year that begins July 1.

Patton also proposed raising the cigarette tax to 40 cents per pack, a 37-cent increase. The estimated revenue would be $167.4 million a year.

He wants to triple the provider tax on nursing and mental-retardation facilities, raising $52.9 million next year for use in gaining more federal matching money.

He proposed a new tax break for low-income people but a phasing out of a tax exclusion for pension income, currently $39,400 a year.

Patton's proposed budget is based on a budget bill passed by the House last year. No budget was enacted because the Senate and House failed to agree.

Patton's budget has some differences: an extra $127 million for schools over two years and nearly $41 million more for Medicaid in the second year.

The money allotted for schools last year was insufficient because of mistakes in estimating the number of students in average daily attendance - a figure on which school districts base their budgets.

He also would earmark $40 million for debt service on enough revenue bonds to finance $525.8 million of new capital projects.

Patton's budget would spend $7.2 billion in the current fiscal year and avoid a shortfall. It would spend $7.6 billion in the second year, which at current rates of revenue would result in a $515 million shortfall.

Patton's proposal

Gov. Paul Patton's proposed budget includes tax increases - and a few, selected cuts - calculated to raise $570 million in fiscal 2004, which begins July 1. Highlights:

Business taxes: Replace corporate income tax with "business activity" tax based on sales (13 cents per $100 of sales in Kentucky) and payroll (6 cents per $100). Estimated total for fiscal 2004: $339.6 million.

Individual income taxes:

Expand low-income credit for taxpayers at or below federal poverty line. Total: Loss of $31 million.

Phase out pension exclusion. Total: $75 million.

Eliminate deduction for income taxes paid to foreign governments. Total: $3.4 million.

Property taxes

Eliminate state property tax on motor vehicles, boats. Total: Loss of $83.5 million.

Freeze state tax rate on real property at 13.5 cents per $100 of assessed value. Total: $4.8 million.

Eliminate state tax on intangible property. Total: Loss of $33.5 million.

Sales taxes

Require dot-coms of companies with Kentucky stores to collect Kentucky sales tax on purchases. Total: $5 million.

Restore sales tax to certain natural gas purchases by manufacturers. Total: $6 million.

Impose sales tax on these services: laundry and dry cleaning; linen and uniforms; janitorial, carpet and upholstery; pest control and exterminators; admissions fees for golf, bowling, skating and amusement park rides; car washes. Total: $48.8 million.

Provider tax

Increase to 6 percent from 2 percent on nursing facilities and intermediate-care/mental retardation facilities. Total: $52.9 million.

Other taxes

Raise excise tax on cigarettes to 40 cents per pack from 3 cents; impose 13 percent excise tax on other tobacco products. Total: $167.4 million.

Tax on electricity from "merchant" power plants. Total: $1.4 million.

Telecommunications tax. Total: $16.3 million.