Ky. Voices: Job creation, not more taxes, will spur Ky. prosperity

May 27, 2013 

Brian Strow is a professor of economics at Western Kentucky University and a member of the Bluegrass Institute Board of Scholars.

  • At issue: May 4 commentary by Jason Bailey, "Tax reform essential to Kentucky's future"

Jason Bailey, director of the Kentucky Center for Economic Policy and a member of the Governor's Blue Ribbon Tax Reform Commission, argued that the Bluegrass state needs to take "bold revenue action" to fund increased government spending.

Bailey is correct that Kentucky's fiscal house is not in order. He also is correct that the commonwealth's tax code could stand some improvement. Unfortunately, his policy prescription of higher taxes and more government spending will only make matters worse for the average Kentuckian.

According to the Federation of Tax Administrators, Kentucky ranked No. 13 in 2011 for tax burden as a percentage of personal income of any state government in the country.

Of Kentucky's neighboring states, only West Virginia ranked higher. Virginia, Tennessee and Missouri all ranked in the bottom 10 states for tax burden as a percentage of personal income.

If the commonwealth's tax burden already is at the high end of the national average, why is Bailey suggesting that Kentucky's problem is a lack of revenue?

In 2011, Kentucky ranked No. 9 for state government spending as a percentage of gross state product (GSP). The only neighboring state to rank higher was West Virginia. Illinois, Indiana, Tennessee and Virginia all ranked among the 10 lowest-spending states.

By advocating for higher taxes and more government spending in Kentucky, Bailey appears to have West Virginia envy: If only Kentucky were more like West Virginia, our problems would be solved.

In 2012, Kentucky had the third-highest state debt as a percentage of GSP of any state. Illinois was our only neighbor in the top half of states for debt-to-GSP ratio.

And it gets worse. In 2011, Kentucky ranked seventh for unfunded public pension liability of any state. Unpaid promises today become tomorrow's debt.

In summary, the problem plaguing Kentucky is that it is spending too much, not too little.

Does the commonwealth have a tax problem? Yes, but not in the way Bailey thinks.

Tax revenues already are high relative to incomes in our state. Increasing taxes further will only chase more jobs from the commonwealth.

In 2010, Kentucky ranked No. 43 for employment-to-population ratio of any state. Only seven states in the country (including West Virginia) showed up for work less than Kentuckians. Higher income taxes would only further discourage work in the commonwealth.

Kentucky's relatively small labor force compared to its population tells us that the income tax base is not very broad. It requires high rates to generate revenues.

These high rates cause jobs to move elsewhere, making it even harder for Kentuckians to find gainful employment. The governor's tax commission was wise to suggest lowering income-tax rates, but should have gone further in its proposed rate decrease.

Also, only 11 states have a more centralized tax policy than Kentucky.

Real growth-inducing reform would decentralize taxing and spending out of Frankfort, reduce tax revenue, spending and debt relative to Kentucky's income, and shift the remaining tax burden from a narrow tax on workers to a broader tax on consumers. Only then will Kentucky be truly fiscally competitive with surrounding states.

In short, Bailey suggests that an increased dose of fiscal poison will cure ailing commonwealth finances when, in fact, what is needed is a strong dose of fiscal responsibility, decentralization and job-spurring tax reform.

Kentucky cannot tax, borrow and spend its way to the promised land, but it can work and save its way to prosperity — if only state leaders would let it.


At issue: May 4 commentary by Jason Bailey, "Tax reform essential to Kentucky's future"

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