By Charles Wolfe
The Associated Press

FRANKFORT - A day after the Kentucky House failed to accept a budget containing his tax plan, Gov. Ernie Fletcher declared a limited victory.

The tax plan was being declared dead just days earlier. Now it remains alive as part of a budget bill passed by Fletcher's Republican allies in the Senate on Monday.

The House, under Democratic control, voted to reject the Senate's version. The budget bill - with tax plan - now goes to a House-Senate negotiating conference, Fletcher said in a news conference Tuesday.

"I thought it was a long, long shot" to get the Senate's version approved by the House. "But the real goal was to get it over to the House ... get it into conference, and we accomplished that," Fletcher said.

The House, voting minutes before a midnight deadline, refused to concur in the Senate's version Monday night. The General Assembly began a two-week recess Tuesday.

Legislators return to the Capitol on April 12 to act on Fletcher's vetoes, if any. The session is scheduled to end April 13.

Fletcher said he would like to be included in the budget conference.

"I think that would make things work better and avoid any problems with just blanket, line-item vetoes," he said. Fletcher has a good working relationship with Senate Republicans, and they could be the administration's voice, he said.

Fletcher's tax plan is a combination of increases and cuts that, in theory, would be "revenue neutral" at the outset. Most of the reductions would be on individual and corporate income taxes. The corporate license tax would be repealed. But the corporate tax base would be expanded by inclusion of limited liability companies.

Proposed tax changes would include an increase of 26 cents in the state excise tax on cigarettes, now 3 cents per pack. Cigars, snuff and chewing tobacco would be taxed for the first time. Taxes would be raised on beer, wine and liquor and telecommunications services, including satellite television.

Democrats in both chambers focused on the increases and began referring to it as the "Republican tax increase" rather than using Fletcher's favorite euphemism, "tax modernization."

Democrats said the plan was overly generous to business. Fletcher says the tax code now stifles economic growth.

"We can't just do a budget in this state and continue to increase our debt year after year without improving our tax system," Fletcher said.

Democrats, especially in the Senate, complained Monday that Fletcher and his Republican allies strong-armed them - offering pet projects to those who agreed to vote for the bill, withholding projects from those who did not.

Fletcher said he had some involvement. "I did the usual gubernatorial thing, which is use my ability to veto, certainly, and I also used my ability to provide support for them," he said.

"We generally talked about the projects that are in the bill because those are the positive things that we put in there. I think you'll see the process involved a lot more carrots than sticks."