Gov. Matt Bevin is absolutely right to join the chorus that has for years called for an overhaul of Kentucky’s outdated tax code.
We desperately need what Kentucky has long lacked: a fair, broad-based tax system aligned with our economy that generates enough revenue to maintain essential government services.
Bevin displayed good sense and admirable resolve earlier this year when he vetoed tax giveaways passed by the General Assembly. Kentucky exempts more taxes than it collects each year, a trend that is both unsustainable and unfair. With a $32.6 billion pension obligation looming, and growing, Bevin pointed out in a recent interview, “we need every bit of the revenue we have, and arguably then some.”
That clear-headed thinking, driven by economic realities, should guide Bevin and the Republican majorities in the General Assembly as they revise our tax code.
They must avoid falling down the rabbit hole of ideological fantasies that could propel Kentucky’s already-fragile economy into a deeper trough.
Bevin’s been vague about exactly what he has in mind but has hinted at steering Kentucky toward supply-side tax policies that include raising sales taxes while lowering income taxes on businesses and high-earning individuals. The theory is businesses will flock to low-tax Kentucky and wealthy people here will reinvest their newfound wealth, creating economic activity and jobs that will generate more taxes than those given up.
While the appeal is clear — lower taxes but give up no government services — the theory has not played out well in reality. Most recently the great supply-side experiment in Kansas, hailed by the Tea Party when it was adopted in 2013, has yielded little but misery:
▪ Personal income tax collections dropped $713 million, 24 percent, in the first year and remain 15 percent below 2013 levels.
▪ Jobs have grown an anemic 2.4 percent, far less than 7.1 percent nationally during the same period and 5.2 percent in Kentucky.
▪ As budget shortfalls piled up, legislators last year increased sales taxes to 6.5 percent, one of the highest in the nation, and cigarette taxes to $1.29 a pack to stanch the bleeding budget.
▪ Still facing shortfalls, Gov. Sam Brownback shifted $750 million from highway projects and delayed $93 million in contributions to a pension system for teachers and community college employees, and $16 million in contributions to the public employees’ retirement system. In March, he ordered $17 million in immediate cuts to public universities.
▪ Kansas’ debt rating has been downgraded twice by national rating agencies, which will drive up the cost of borrowing, further compounding the problems.
Bevin and other Republican leaders must ask themselves if this is where they want to take Kentucky.
They must keep in mind that Kentucky is not starting from a position of economic strength.
Kentucky’s debt rating is already lower than that of Kansas, even after the downgrades. And Kentucky leaders have already shored up the general fund over the years by shorting contributions to pension funds, leading to the pension crisis. The Kansas Public Employees Retirement System was 67 percent funded last December; Kentucky’s was 16 percent funded at last count.
At a time when we need to educate and re-educate workers to function in a rapidly changing economy, Kentucky has already cut funds for education at every level. A tax reduction that undercuts our ability to graduate work-ready students will not spur the economy.
The reasons supply-side economics don’t work are almost as simple as the concept itself: Businesses almost never move just for lower taxes; and many people hold on to the money they gain from lower taxes. They don’t invest to create jobs or buy more goods, they just sock it away.
Meanwhile, working people with lower incomes are hit with higher sales taxes, meaning their dollars don’t go as far so they buy less.
This is not a moment for a grand experiment doomed to failure, for refuge in magical economic thinking that all our woes can disappear by waving a market-forces wand.
There are many less-risky ways to reform Kentucky’s outdated tax code. Reducing the gargantuan exemptions is one; extending sales taxes to services is another.
Bevin and his Republican majorities can get these things done. For the good of this state, that’s what they should do.