Since the Great Recession Kentucky state government has endured 15 budget cuts, totaling $1.7 billion.
The reality now, as Kentucky faces a future of more severely underfunded schools and universities, billions in unfunded pension obligations, infrastructure backlogs and a host of other challenges, is that state government needs more money. Gov. Matt Bevin said as much himself Thursday when he told the annual Kentucky Chamber of Commerce dinner the state doesn’t have enough revenue to fund the agency requests. “Truth be told, I wish we did.”
While Bevin has promised cuts, he’ll have trouble finding enough fat to change this picture.
Former Lt. Gov. Jerry Abramson’s Blue Ribbon Commission on tax reform reported in late 2012 that state government’s workforce had shrunk to its lowest level since 1974.
That nonpartisan commission included leading business figures such as Marion Forcht, co-owner of the banking group of that name, James Booth of Booth Energy, and Central Bank CEO Luther Deaton.
Most of the money the state collects is spent on education, prisons and caring for the most vulnerable citizens. The largest share — 44 percent —goes to elementary and high school education. Still, per-pupil spending has sunk 12.1 percent since the beginning of the recession in 2008, according to the Kentucky Center for Economic Policy.
Even a booming economy would not change this picture because our state tax structure is so fundamentally mismatched with the economy. The fast-growing service economy is virtually untaxed.
Clearly there is no political appetite for the true overhaul Kentucky’s tax system needs, but there are a few things Bevin and the General Assembly can do. Some suggestions:
First: Examine tax breaks — tax expenditures in budget parlance — as closely as appropriations. Kentucky annually forgives more taxes than it collects, about $12 billion compared to $10 billion. While appropriations must be approved every two years, most tax breaks are forever. The Abramson commission recommended a review every five years of all tax expenditures and incentives. Future tax breaks — and plenty of bills have been filed already to grant more — should sunset, or expire, at a specific time unless the legislature reauthorizes them.
Second: Tax services. The Abramson report estimated Kentucky can gain $106 million annually by extending sales tax to selected services. Among the services many states tax that Kentucky doesn’t: auto-rental and leases and limousines; service contracts; cable and satellite TV; auto repair, washing, waxing and storage; laundry and dry cleaning; health clubs; private club memberships; pet grooming; window cleaning, and private investigating.
Some of these can be enacted this session. Before the next budget session in two years, the General Assembly must conduct a thorough, unsparing look at the entire service economy and how best to tax it.
Third: Lower exclusions on taxing pensions. The first $41,110 in pension income, per individual, is excluded from state taxation. The Abramson task force recommended reducing that to $30,000, estimating an annual revenue gain of $485 million.
Currently, a couple does not pay any Kentucky income tax on their first $82,220 in pension income. Social Security benefits also aren’t subject to income tax in Kentucky, so a couple could easily have well over $100,000 in annual income before paying even $1 in state income tax.
No one wants to raise, or pay, more taxes. But, no matter who is governor or which political party controls the General Assembly, Kentucky’s future is very grim without more revenue.
Bevin is absolutely right there is not enough money to meet current needs, make up for the deep cuts of the recent past or fund pensions state employees and teachers have been promised.
There is no magic of math or politics that will set Kentucky on a fiscally sustainable course without additional income. Bevin and the General Assembly must get to work on sensible, fair tax policy to raise money.