Tom Eblen: Tax reform is overdue

Gov. Steve Beshear says this isn't a good time for comprehensive tax reform.

It wasn't a good time in 2002, when economist William Fox's report to the General Assembly showed how Kentucky's tax structure was no longer keeping pace with changes in the economy or the state's needs. And it hasn't been a good time in any year since then.

Politically, it never will be a good time for comprehensive tax reform. But with Beshear's slots campaign coming up lemons and the General Assembly facing one of the worst slash-and-burn budgets in memory, it's at least time to begin discussing it seriously.

Reps. Bill Farmer, R- Lexington, and Jim Wayne, D-Louisville, have offered visions for what comprehensive tax reform could look like from different ends of the ideological spectrum. They were promised a hearing between legislative sessions. It didn't happen.

Farmer would eliminate the state income tax and lower the sales tax slightly by taxing services as well as goods. Wayne would tax some services, mostly those used by wealthy people, and make the income tax system more progressive, like the federal system, taxing the rich more than the poor.

My guess is lawmakers eventually will look at some hybrid of the two. But such a plan can't be "revenue neutral," at least in the long run.

While public money can always be spent more wisely, the reality is Kentucky needs to invest more in education and social services to move up from the bottom of national rankings of income and quality of life.

Broadening the sales tax to services could make a big difference because of growth in the service economy. Kentucky also should clean up its hodgepodge of special-interest sales tax exemptions. For example: There's a sales tax on horse feed but not cattle feed.

For state spending to remain at current levels through June 2012, lawmakers would have to find $1.9 billion in revenue or cuts. The state can cover some of that shortfall with $485 million in one-time federal stimulus money. That still leaves a $705 million gap, which means cuts are coming.

But before lawmakers bring out their axes, they should use scalpels.

The Kentucky Chamber of Commerce issued a report recently called The Leaky Bucket that highlights three areas where state spending has gotten out of whack in the past decade.

By far the biggest of those areas is public employee health care, where state spending is up 174 percent compared with an overall state budget increase of 33 percent. The state now pays $1.2 billion a year to insure active state employees, retirees and teachers — 12 percent of the total state general fund.

The Chamber thinks the state could better manage its costs with more emphasis on wellness and disease prevention. "Reasonable changes" could free almost $200 million for the 2010-12 state budgets, it says.

Those changes include having state employees pay a portion of their health insurance premium — say $50 a month — as most private sector workers must do. That would save the state $94 million a year.

The other two "leaky bucket" targets were prisons and Medicaid, the federal-state program that pays for health care for more than 745,000 low-income Kentuckians.

Corrections spending rose 44 percent in the past decade as Kentucky had the nation's fastest-growing prison population. The Chamber outlines several ways that spending could be cut without lawmakers being accused of being "soft on crime."

Kentucky's Medicaid spending has grown twice as fast as total state spending, and the Chamber recommended looking to other states for "best practices" and shifting more spending to wellness programs.

When lawmakers return to Frankfort in January, they must plug some holes in the leaky bucket . But they also need to get serious about creating a new bucket, one big enough to meet Kentucky's needs.

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