Kentucky’s tax code gives more money than it collects. Would reform change that?

The sales of young horses at Keeneland are not taxed under Kentucky’s tax code.
The sales of young horses at Keeneland are not taxed under Kentucky’s tax code.

In 2016, buyers at Keeneland’s two biggest sales purchased nearly $500 million worth of young horses and breeding stock. None of them paid sales tax.

Neither did people buying boats and maritime supplies, a giveaway that cost the state about $6 million in 2016, according to a biennial report from the Office of State Budget Director. Or purchasers of tombstones ($8 million). Or those who paid for legal services ($121 million).

All of these things are exempted from the state tax code. Collectively, they’re known as tax expenditures and they totaled $12 billion in 2016. In comparison, the state actually collected $10 billion in taxes.

Each exemption was enacted by the legislature for a specific reason, whether to help the horse industry with competition in other states, or to save grieving families from one more charge. But are they working? No one knows. Proposed studies have never been done, and, in 2008, the House killed a bill that set time limits on each break. The only information is the report from the state budget office that details the history of each tax break and how much it is expected to cost the state over the next two years.

Many of the tax giveaways are long-standing and popular. For example, there is no sales tax on food in Kentucky, nor a tax on residential utility bills. Those two exemptions cost the state almost $1 billion a year.

But, as the 2016-2018 report notes, tax expenditures never receive any review by lawmakers because they are automatic and do not expire. This also gives them priority funding over all other programs. “In all probability, many ‘tax expenditure’ programs would not receive the same priority if they had to compete on equal footing during the biennial appropriation process,” the report says.

For example, 40 years ago, the legislature passed a sales tax break for factories and power plants to buy pollution control equipment. Today, most of those expenditures are required by state and federal regulations. But the tax break — which will cost the state about $90 million over the next three years — still stands.

It’s possible the tax picture could change. Gov. Matt Bevin has suggested that he will call a special session next year to overhaul the state’s tax code. The new chairman of the House Appropriations and Revenue Committee, Rep. Steven Rudy, R-Paducah, said tax expenditures need to be part of what is studied.

“We have to look at what’s being collected and what’s not being collected,” Rudy said. “We have to make it all mesh together and come up with a proposal and a plan.”

Rudy and everyone else is staying mum on what that plan might look like. Bevin spokeswoman Amanda Stamper said budget director John Chilton was too busy to talk to the Herald-Leader.

Numerous task forces have recommended that Kentucky modernize its tax code. The most recent Blue Ribbon Commission, appointed by Gov. Steve Beshear in 2012, suggested that Kentucky broaden its tax base by taxing growing parts of the economy, such as the service industry. Kentucky loses almost $2 billion from not applying the sales tax to services, such as legal services. It also recommended cutting the corporate income tax.

Jason Bailey, director of the liberal-leaning Kentucky Center for Economic Policy, served on that tax commission. He thinks the state could bring in more revenue for schools, public services, and the state’s financially shaky public pension systems by eliminating some tax breaks and reforming the tax code.

But Bailey is concerned the Bevin administration will produce a tax reform plan that looks much like one in Kansas, where in 2012 Gov. Sam Brownback and the legislature slashed income and business taxes in order to improve job growth. Instead, according to the Wichita Eagle, the state now faces a $350 million budget gap for the current fiscal year, which has already forced cuts to most state agencies, including K-12 education and universities.

The Federal Reserve Bank of Philadelphia ranked Kansas 50th in the nation for employment growth, manufacturing hours worked, unemployment rate and wage growth.

Brownback was advised by supply-side economist Art Laffer. The Courier-Journal recently reported that for the first time, Laffer and his associates had started giving generously to the Kentucky GOP, about $164,000 a month before the election.

“I’d love to see more evidence that cutting income tax rates will bring more business to the state,” Bailey said. “It makes it much harder to invest in public entities, like education.”

Rep. Rudy said he was “intrigued” by Kansas’ example

“I think they looked at a long-term tax policy and they’re seeing some short-term pains,” he said. “We cannot afford to do that with pensions and things. We can learn more, maybe take the good parts of it and learn from the bad.”

Linda Blackford: 859-231-1359, @lbblackford