LEXINGTON, Ky. -- Congress needs "to cut domestic welfare and entitlement spending" to balance the budget rather than tax the rich more, U.S. Sen. Rand Paul, R-Ky., told a Commerce Lexington luncheon on Friday.

Instead of raising taxes to avoid the approaching "fiscal cliff," the debate should focus on what federal spending to cut and how much, Paul said.

"We should try to minimize how bad our government is and how much it gets in the way," he said.

Unless Congress and President Barack Obama reach a compromise by Dec. 31, there will be an immediate 9.4 percent drop in defense funding and an 8.2 percent reduction in discretionary domestic programs, sparing most entitlements.

That could be a good first step toward eliminating the federal debt, Paul said, but he warned that the three major entitlement programs — Social Security, Medicare and Medicaid — already consume two-thirds of the federal budget, and they're growing fast.

However, few states rely on domestic welfare and entitlements more than Paul's own Kentucky.

In 2011, more than half the personal income in three Kentucky counties — Owsley, Wolfe and McCreary — came from federal transfer payments, including welfare and food stamps, disability, veterans benefits, Social Security, Medicare and Medicaid.

Statewide, the so-called "mailbox economy" provided 31 percent of Kentuckians' personal income. The national average was just 17 percent.

If Congress takes a knife to welfare and entitlements, Eastern Kentucky will bleed, said Wolfe County Judge-Executive Dennis Brooks.

In 2011, Wolfe County's 7,342 people took $60.3 million in transfer payments from Washington — more than $8,200 for every man, woman and child. Forty-two percent of residents live under the poverty line.

"Cuts would really hurt us, ain't no doubt about it," Brooks said in a phone interview Friday. "I'm sure that cuts are gonna come. But we just don't have any industry here at all. Dairy Queen is our biggest employer. It's very sad to say this, but that's the truth."

After his speech, Paul said he doesn't intend to cut existing benefits to poor people in Wolfe County. Instead, Social Security payments could be reduced for wealthier Americans through means testing, and the age at which people retire and tap Social Security and Medicare could continue to rise, he said.

"We need to look at it and see how we'd do it," Paul said. "Nobody's talking about 'Oh, we've gotta go cut the payments to somebody making $20,000 a year.' Maybe it's where we look at means testing, that people who aren't in lower income brackets aren't receiving them."

But there are several problems with Paul's proposals, said Ron Crouch, director of research and statistics at the Kentucky Education and Workforce Development Cabinet.

One, Crouch said, the majority of Kentuckians getting government checks aren't jobless welfare recipients, or rich people who could be culled through means testing. They're the working poor with low-wage jobs and no benefits, and they're the elderly who rely on Social Security, Medicare and Medicaid to pay for food, housing, medicine and nursing care. Neither of those situations are going away, he said.

Two, he said, reducing Medicare and Medicaid means less money for health care providers, who employ many people in rural America, including Eastern Kentucky.

For instance, half of Owsley County's 378 private sector jobs are in medicine and social assistance, Crouch said. Reduce government payments to medical providers around Owsley County and many of those precious jobs will disappear, he said.

Three, he said, limiting Social Security and Medicare to the poor and working class may look smart on paper. But if they're seen as just another antipoverty program, like welfare, they likely will be attacked, defunded and given time limits, as happened with welfare in 1996, he said.

"Once we go to means testing for a program and we don't have everyone enrolled in it anymore, does that eliminate widespread public support for the program?" Crouch asked. "With welfare, yes, it did, and we basically did away with it."

After Friday's luncheon, Paul said he would prefer for all of his constituents to find good jobs in a booming economy. Lower taxes and fewer government regulations "will cause a growing economy and help many people who are currently dependent to become independent."

"It's not an easy answer," Paul said. "If it was an easy answer, somebody else would already have fixed it. I can tell you we've been trying for 40 years, and most of it has been throwing money at the problem. I really think you need to create opportunities for people to become independent. And I think that's what people want. I don't think people are happy or glad they're dependent."

Reach John Cheves at jcheves@herald-leader.com. Twitter: @BGPolitics. Blog: bluegrasspolitics.bloginky.com