Herald-Leader Editorial

Kentucky exempts more in taxes than it takes in as workers' wages erode

January 5, 2014 

Predictions of Kentucky's fiscal doom have been so frequent for so long that they have taken on a "sky is falling" monotony.

But, rest assured, unlike Henny Penny's hysteria, none of the fiscal warnings have been false alarms.

This will become painfully evident when the legislature convenes Tuesday and begins digging into the biennial budget.

A weak economic recovery plus an obsolete state tax system equal nowhere near enough new revenue to meet current obligations, much less restore any of the $1.6 billion in spending cuts that have been made since the Great Recession dawned in late 2007.

Education at all levels has less state support in Kentucky now than six years ago, and Kentucky's support for education has continued to decline even as other states have been restoring school funding.

Kentucky's state government employs the fewest number of people in 40 years; state employees have gone without raises for five years while their benefits have been cut.

And, though jobs are the biggest need here and nationally, the Economic Development Cabinet, like the rest of state government, has been decimated. An agency that once had a staff of 115 but now limps along with 71 lacks the resources to aggressively market Kentucky or do much more than process employers' applications for tax exemptions.

Employment in Kentucky is still about 34,000 jobs or 2 percent below what it was in 2007, according to a study by University of Louisville economist Paul Coomes for the Kentucky Chamber of Commerce (www.kychamber).

And any growth tends to be in lower-wage jobs. While jobs in manufacturing and construction are down 11.5 percent and 20.1 percent respectively since December 2007, leisure and hospitality jobs are up 3.9 percent.

Even before the economic downturn, Kentucky was suffering wage erosion. Kentuckians working for poverty-level wages ($11.29 an hour) grew from a fourth of the work force in 2001 to a third in 2012. That's according to a budget preview by the Kentucky Center for Economic Policy ( www.kypolicy.org.) entitled "Reinvestment or Retrenchment?"

It's not just the wobbly economy that's depressing state revenue, however. As study after study has documented, Kentucky's tax structure is out of sync with the modern economy.

Our state now exempts far more in taxes than it collects. Tax expenditures — the formal term for exemptions, deductions, credits and various other breaks — amount to $15.7 billion compared with $9.5 billion in General Fund revenue.

While governors and lawmakers routinely comb through the state budget looking for places to cut, rarely, if ever, do they examine the $15.7 billion in tax exemptions and ask whether they are producing economic benefits for anyone other than the direct recipients of the tax breaks.

Kentucky desperately needs both short- and long-term public investment to rev up the economy and improve the lives of our people. But the state can afford neither.

State revenue is expected to fall $1 billion short of need by 2020 without changes to the tax system, according to the consultants who worked on the latest tax study.

Expanded gambling — making a move but still a long shot — could add $286 million to the General Fund, according to an analysis of pre-filed legislation. That's almost enough to get public school funding back to pre-recession levels, while creating gambling-related social ills and costs and leaving a host of other needs unmet.

At the risk of sounding monotonous, Kentucky can't delay tax reform any longer.

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