$113 million shortfall? Kentucky’s weak jobs outlook might bring budget cuts

Kentucky’s state government could face more budget cuts this summer because its $10.6 billion General Fund, which pays for most state services, is expected to fall $113.2 million short when fiscal year 2017 ends June 30.

The state’s revenue collection fell by 3.2 percent in the fiscal year’s third quarter compared with the same period a year earlier, breaking a three-year growth streak, state budget director John Chilton said in a report released Monday.

Sluggish 1.2 percent job growth contributed to declines in individual income taxes and sales taxes, according to the report. Corporate income taxes and lottery sales also declined during the third quarter.

The report predicted that job growth in Kentucky would remain weak at least into the first months of fiscal year 2018. Only 54.7 percent of working-age Kentuckians were employed in 2016, one of the lowest workforce participation rates in the country.

“Kentucky is not an island,” said Janet Harrah, senior director of the Center for Economic Analysis and Development at Northern Kentucky University.

“A lot of our big employment sectors like auto manufacturing, aircraft manufacturing and coal mining, these are parts of national markets,” Harrah said. “And until you have stronger growth in these markets, you won’t really move the job numbers in Kentucky and, as a result, you won’t increase the tax collection.”

Gov. Matt Bevin is weighing his options with two months remaining in the fiscal year, spokeswoman Amanda Stamper said.

“In order to ensure a balanced budget, we are planning for the possibility of potential cost-saving measures,” Stamper said. “The budget office is preparing a full set of options to discuss, and Governor Bevin will decide how to proceed if and when that becomes necessary.”

This late in the budget cycle, Bevin’s only choices appear to be cutting state agencies further, tapping the state’s “rainy day” budget reserve trust fund or some combination of the two, said Jason Bailey, executive director for the Kentucky Center for Economic Policy in Berea.

“It’s more bad news,” Bailey said. “There isn’t much left to draw down from in the rainy day fund, only $209 million. And a lot of the places they would be looking to cut already have been cut by 9 percent in this budget, not even counting all the reductions in previous budgets. So at some point, you’ve really diminished the quality of services you’re offering to the public.”

Bailey and House budget chairman Steven Rudy, R-Paducah, both said that a revenue shortfall would force the General Assembly to ask hard questions about tax reform in a possible special session this fall, not to mention the regularly scheduled budget-writing session in early 2018.

“It’s certainly concerning,” Rudy said. “I can tell you that dialogues are beginning. We’ve got a lot of positive things going on in Kentucky right now with major expansions and new industries locating here. We can hope that continues and it makes some sort of an impact. But by and large, I think the people would say they prefer a more consumption-based tax system to one that taxes incomes. That just seems more fair.”

Bailey disagreed, arguing that a higher sales tax would place an unfair burden on poorer Kentuckians who, by necessity, spend most of their money. He said Kentucky could raise more revenue by eliminating some of the tax breaks that benefit wealthier individuals and corporations. Corporate income tax collection is declining in Kentucky and now makes up a tiny part of the budget, he said.

“You look at the corporate tax code and it’s so riddled with special exemptions approved for different industries by the legislature that we’ve basically gutted it,” Bailey said.

This story was originally published May 2, 2017 at 4:37 PM with the headline "$113 million shortfall? Kentucky’s weak jobs outlook might bring budget cuts."