In his State of the Commonwealth address a year ago today, Gov. Matt Bevin boldly proclaimed that he and the new Republican-controlled General Assembly would turn some “sacred cows” into “hamburger.”
That was the tough-talking governor’s way of saying that Kentucky’s antiquated tax code needs to be thoroughly examined, and tax breaks that don’t pay substantial returns to the overall economy need to go.
It was the right thing to say, and it remains the right thing to do. But since then, Bevin seems to have become a vegetarian who wants to put Kentucky on a starvation diet. Where’s the beef?
Instead of making any proposals for long-overdue tax reform, the Republican governor has suggested more deep cuts to education, health, science and the arts.
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He did recommend more spending for several areas of government that need it, and he wants to pay more into under-funded public employee pension plans. But virtually all of that proposed spending is taken from other parts of a state budget that has been slashed for a decade. There is little new revenue.
Lawmakers are at work on their own budget plan. But without tax reform, it can be little better than Bevin’s and just a different version of what Kentuckians have seen for two decades: too little money chasing too much need.
That’s because Kentucky has a tax code designed for the 1950s, and tax revenues haven’t kept pace with economic growth since the 1990s. It’s also because legislators and governors have given out tax breaks like candy for decades. Kentucky now forgives more taxes ($13 billion) than it collects ($11 billion).
In addition to all of the damage budget-cutting has done, failure to modernize the tax code is the main reason for the pension crisis. Governors and lawmakers skimped on pension contributions to balance the budget.
One more point needs to be made: Bevin and his supporters like to claim he is “cleaning up a mess” made by Democrats. But this mess is bipartisan. It has been nearly 20 years since Democrats had the kind of power Republicans have now. The two parties have shared legislative control since 1999, when Republicans became the Senate majority. Republican Ernie Fletcher was governor from 2003-2007. Both parties created this crisis, and both must come together to solve it.
Eliminating poor-performing tax breaks is a good place to start. To get the conversation going, Herald-Leader reporters have identified several that need attention.
Bevin acknowledged one in his budget proposal: He cut funding for a tax credit for filmmakers, which had ballooned to $162 million with little proof of benefit.
But that only scratched the surface. For example: Kentuckians pay sales tax on goods, but not services, as residents of many states do. That costs the state as much as $2.5 billion. And in an increasingly service-oriented economy, it makes no sense.
Tax-Increment Financing also needs scrutiny. Originally designed to encourage developers to build in blighted urban areas, this tax break has been expanded to subsidize green-field construction and a luxury shopping mall. Developers have gotten more than $111 million in TIF tax rebates in the past 10 years and at least $2.9 billion had been pledged on current projects over the next three decades.
Why does Kentucky tax coffins but not tombstones? That costs the state $8.5 million. Why do luxury houseboat owners get property tax breaks that allow them to pay less than people who own small fishing boats? That costs the state at least $626,000, and probably a lot more.
The Kentucky Center for Economic Policy has done the kind of deep dive into the tax code that legislators need to do, and it has offered many good recommendations for increasing revenue and making the tax code fairer. (More info: Kypolicy.org).
Bevin and lawmakers must find the courage to determine which tax breaks are providing real benefit to the state economy and which are not. And, just as important, voters must give them political cover to do it.
Nobody wants to pay more taxes or give up their tax breaks. But public services and the quality of life they provide are like anything else: You get what you pay for.