Last fall, a group of five wealthy men from out-of-state dumped at least $211,500 into Republican efforts to take over the Kentucky House of Representatives for the first time since 1921.
They live from Miami to New York, but have one common bond: Arthur Laffer, a prominent conservative economist who served in the Reagan administration.
They also share a similar goal: reshaping how Kentuckians pay taxes.
“I think now’s a good time for any state like Kentucky to look at their tax structure and say ‘how can we modernize?’” said Travis H. Brown, a Missouri lobbyist who donated $23,000 to GOP House members, more than any other individual.
They picked a winning horse, pumping $105,000 of their money directly to winning candidates and another $59,500 to state GOP committees that gave more than $1.8 million to successful GOP House candidates.
Republicans claimed a super majority in the House and quickly pledged support for Gov. Matt Bevin’s promise to call a special law-making session later this year to transition Kentucky’s tax system from one based on production (income taxes) to one based on consumption (sales taxes).
That economic philosophy was, in many ways, coined by Laffer. His message of lowering income taxes and reducing business taxes has been embraced by scores of Republican politicians across the country.
Though Laffer and his associates may feel the time is right for business-friendly tax reform in Kentucky, there’s a roadblock — massively underfunded pension systems for state workers and teachers.
Last November, financial projections showed Kentucky’s state pension systems had an unfunded liability of $32.5 billion, with the main pension system for state employees only 16 percent funded (anything below 80 percent is considered underfunded). Now, Bevin claims that number is grossly miscalculated, suggesting the state’s real pension debt is closer to $82 billion.
To meet that challenge, Bevin warned in his State of the Commonwealth Address last month that any changes to Kentucky’s tax code will have to raise revenue, not reduce it.
What voters typically believe is they know how to spend their money better than the government knows how to spend their money.
Travis H. Brown
“This is not going to be a revenue neutral tax plan,” Bevin said in the speech. “It’s not. We can’t afford for it to be, that’s a straight up fact. We cannot pay off eight times what we bring in if we simply reshuffle the deck.”
Brown, though, says Kentucky can still raise revenue without raising taxes, arguing that the state can even cut taxes if it’s on the right side of the “Laffer Curve,” an economic concept that says a higher tax rate doesn’t necessarily mean more government revenue.
“What percent of your state government is not efficient as it should be?” Brown asked. “What voters typically believe is they know how to spend their money better than the government knows how to spend their money.”
Regardless of how lawmakers in Frankfort decide to rewrite the tax code, Laffer and his associates clearly thought Kentucky was ripe for an influx of conservative philosophy.
“It just looked like the time and place where it was to come,” Brown said.
Here’s a closer look at the five men, of which only Brown responded to Herald-Leader requests for interviews.
Most big-money Republican donors, the people who hit the maximum contribution limit on multiple House candidates last year, have a connection with supply-side economist Arthur Laffer.
Laffer, who owns a home in Kentucky but is based in Nashville, served as an economic adviser in the Reagan administration and is credited with developing the Laffer curve, which illustrate’s his premise that reducing tax rates can stimulate economic activity and generate additional tax revenue.
Laffer serves on the board of the American Legislative Exchange Council, a group that promotes conservative policies on the state level, often by drafting model legislation.
He was a paid consultant to Kansas Gov. Sam Brownback when Kansas passed large cuts to its state income tax in 2012. The state’s economy has fallen into disarray since, and Kansas recently reported a $346 million budget deficit.
Kansas’ Republican-led legislature recently approved a bill to raise income taxes to make up for their shortfall, but fell three votes shy of overriding Brownback’s veto of the bill Wednesday. That was one day before the Kansas Supreme Court declared the state’s school funding system unconstitutional, saying lawmakers had failed to ensure adequate funding for public schools.
Laffer has said the tax plan he and Brownback discussed isn’t what ultimately became law in Kansas, but he has defended the state’s changes all the same, pointing to Kansas’ low unemployment rate. The state just needs more time to see the full benefits of the “supply-side” effects, he has said.
Laffer has met with Bevin, but only on an informal basis, according to the Associated Press. Laffer also has lunched with House Speaker Jeff Hoover, R-Jamestown, who represents the area where Laffer’s Kentucky house is located.
Travis Brown wants states to eliminate income taxes.
A resident of Miami according to his campaign donations, Brown has written two books on the subject of taxes. One of those books was coauthored with Laffer.
Brown is fully entrenched in tax code policy. He started his career as a lobbyist in Missouri (a state that has since implemented a Laffer-esque tax code) and the aspiring media maven has traveled around the country on his personal plane making the argument that states should get rid of their income taxes.
One of his core messages, and the topic of his book “How Money Walks,” argues that people move to places where they don’t have to pay high taxes. To prove his point, Brown uses IRS tax migration data to argue that over recent decades, people have moved to places with lower tax rates.
When asked for examples of states with tax codes Kentucky could aspire to emulate, Brown cited reforms in Oklahoma and Ohio. In 2014, Oklahoma passed tax reform that went into effect in 2016, reducing the income tax for the highest tax bracket and requiring three-fourths support in the Oklahoma House and Senate to increase taxes.
Ohio has eliminated its estate tax and cut its income tax and Ohio Gov. John Kasich is proposing more changes.
Brown said he has met informally with Bevin two or three times at various events.
James Dondero is the president of Highland Capital Management, a private equity firm in Dallas Texas.
The hedge fund manages about $15 billion in assets, according to the company’s website, and was founded by Dondero in 1993.
Dondero serves with Laffer on the board of directors of NexPoint Residential Trust, which invests in real estate.
He hasn’t been a big player in national politics beyond supporting former New York Mayor Ruldolph Guilani’s failed presidential bid and a few congressional candidates, according donation records from the Federal Elections Commission.
In his free time, Dondero is a big-game hunter. He told the Dallas Morning News he enjoys eating giraffe jerky.
In 2009, after Missouri eliminated its limits on campaign contributions, a multimillionaire who made his money in the stock market became one of the most influential political donors in the state.
That multimillionaire, Rex Sinquefield, invested heavily in turning Kentucky red in 2016.
Sinquefield isn’t completely new to Kentucky politics. In the past, he’s donated to U.S. Senate Majority Leader Mitch McConnell, U.S. Sen. Rand Paul and U.S. Rep. Andy Barr, R-Lexington.
But as Kentucky Republicans made their blitz to control the Capitol in Frankfort in 2016, Sinquefield donated at least $43,500 to aid the effort, including $20,000 directly to winning Republicans.
That’s a drop in the bucket for Sinquefield, who spent $11 million on candidates in Missouri’s 2016 primary election, and who has financed entire think tanks in Missouri to research and promote his conservative ideology.
If you get involved at the local level with the route I described, you’d be amazed at how much influence you can have.
Sinquefield has plenty of political interests, but at least two of them are topics the Kentucky General Assembly has promised to address in 2016: reform of taxes and public schools.
Sinquefield shares the tax philosophy of Laffer and Brown. The three authored a book called “An Inquiry into the Nature and Causes of the Wealth of States: How Taxes, Energy, and Worker Freedom Change Everything.” Sinquefield also contributed to Brown’s book “How Money Walks.”
In 2014, Sinquefield supported a measure to lower Missouri’s income tax, which the Missouri legislature enacted by overriding a gubernatorial veto.
He has put his economic might behind the movement to lower income taxes in other states as well, donating heavily to politicians in Kansas who reduced the state’s income tax.
Sinquefield also wants to reform the way public schools operate. In a 2014 speech, he talked about getting rid of teacher tenure in Missouri, a goal that he said would help the public education system. His push for a constitutional amendment to end teacher tenure ultimately failed.
Although he hasn’t always won, Sinquefield’s political machine — think tanks, lobbyists and campaign donations — has brought his agenda to the forefront of state-level politics.
“If you get involved at the local level with the route I described, you’d be amazed at how much influence you can have,” Sinquefield said in 2014.
Harold Blue is the founder of an investment company called BelHealth Investment Partners.
It specializes in investing in various health care companies and is based in New York City.
Blue has donated to politicians since at least 2003, according to the FEC, but his donations in 2016 were the first he has made in Kentucky.
Laffer is an advisory member of Blue’s investment company.