Kentucky has an opportunity, through the work of the governor's Blue Ribbon Tax Commission, to take a close look at the realities of state taxes and spending, and develop a system that will help ensure the long-term sustainability of important government programs while building taxpayers' confidence in how their money is being spent.
The Kentucky Chamber of Commerce, whose members employ more than half the state's work force, thinks several basic points should be kept in mind as the commission conducts its review:
Improving Kentucky's competitiveness relative to other states is critical to building an economy that will produce more tax revenue to fund needed programs.
State spending must be subject to a close review in light of the fact that spending priorities during the past few decades have shifted toward prisons, pensions and health care and away from investments in education and economic development.
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Kentucky, and most other states, encountered huge revenue problems during the worst economic downturn the nation has experienced in more than 75 years. We should not overreact to what we hope was a once-in-a-lifetime situation.
Although not widely discussed, state spending has grown faster, on average, than the state's economy during the past 20 years.
The economic growth necessary to produce more tax revenue cannot happen if Kentucky's employers are put at a disadvantage through tax changes that hamper their ability to expand and create or retain jobs.
But slow state revenue growth in recent years has prompted some calls for higher taxes. One point that can get lost in these discussions is that the economic downturn prompted that slowing revenue growth, and it is doubtful that any tax system could have fully protected Kentucky from the effect of such a recession.
Much of the early rhetoric surrounding the tax commission's deliberations speaks of "tax reform"— a phrase that is heard by many to mean "tax increase." But as a practical matter, any benefits resulting from tax reform are likely to dissipate quickly unless close and serious attention is paid to state spending.
The chamber's 2009 Leaky Bucket report and follow-up report in 2011 noted that unsustainable spending in several areas continues to pull money away from investments in education and economic development. Although progress has been made in slowing the spending increases, the growth rate in Medicaid, corrections and public employee health insurance spending continued to outpace that of the overall state budget through fiscal 2012.
Here is the bottom line: Unless this spending is brought under control, it really doesn't matter how much tax revenue is raised. The "leaks" in the spending budget will ensure that no amount is enough.
And the more tax money we shift away from investments in education, the more unlikely it is that we can create a more highly skilled work force and stronger economic future. Two other items should be noted:
Local occupational taxes are putting Kentucky's major metropolitan areas at a competitive disadvantage with their peer cities in the South. Kentucky's cities are critical to the state's overall prosperity, but these taxes limit our cities' prospects for attracting high-quality jobs. Compared to other states, Kentucky relies too heavily on income taxes at the state and local levels.
Kentucky ranks 30th in the nation in the amount of its residents' personal income that goes to government spending, but Kentuckians earn less than the residents of 43 other states. State government has grown beyond the capacity of citizens and businesses to support it.