Tom Eblen

Once this bad state budget is finished, Kentuckians must demand tax reform

Gov. Matt Bevin delivers his proposed budget to a joint session of the Kentucky General Assembly on Jan. 26.
Gov. Matt Bevin delivers his proposed budget to a joint session of the Kentucky General Assembly on Jan. 26. AP

Gov. Matt Bevin proposed his version of a two-year state budget. House Democrats proposed their version, and Senate Republicans their version. Legislative leaders are now meeting in secret to reach a compromise.

But here’s the bottom line: All of these budgets are bad, and the final version will be bad, too. It’s just a question of how bad. Whatever budget emerges from this process will fail to meet Kentucky’s present needs, much less make investments essential for future prosperity.

The problem is that Kentucky’s tax system is outdated, and nobody has the political courage to fix it. And by nobody I mean governors, legislators and especially voters. As long as Kentuckians vote for politicians who lie to them by saying taxes should be cut rather than raised, this state will be doomed to mediocrity or worse.

How bad must things get before somebody shows real leadership?

The problems with Kentucky’s 1950s tax system have been well known and getting worse for nearly three decades. The issue has been studied to death, most recently in 2012 by Gov. Steve Beshear’s “Blue Ribbon” commission. Each study has recommended many of the same solutions, virtually all of which have been ignored.

The biggest problem is that Kentucky’s tax system no longer reflects the economy. That means revenues aren’t growing with the economy. For example, Kentucky taxes goods but not services, even though the economy has been shifting toward services for decades.

Tax reform in Kentucky will be hard, painful and politically unpopular. But so will continuing to ignore the problem.

Another problem is that the tax code is riddled with special-interest loopholes and exemptions, most of which do nothing to help overall prosperity. While the state’s general fund takes in $10.9 billion in revenue, it gives up $12.9 billion in tax breaks.

Kentucky’s tax system is highly centralized, giving local governments too little flexibility to meet their needs. Property taxes are too low, compared with neighboring states. The combined state and local tax burden hits middle-class families much harder (10.8 percent of income) than the richest families (6 percent).

There are many other problems, too. They are all well-documented and explained in the 2012 Blue Ribbon Commission report, prepared by the University of Kentucky’s Center for Business and Economic Research, and a more recent analysis by the Kentucky Center for Economic Policy. Both reports are available online.

By putting off tax reform for so many years, the problems have grown steadily worse. Governors and lawmakers have repeatedly robbed Peter to pay Paul, hurting the state’s credit rating and causing serious problems such as the pension shortfalls that state officials are now scrambling to fix.

Years of budget-cutting have done serious damage to everything from public schools to state parks. A big example is higher education, which has lost $173 million in state funding since 2008. That has contributed to soaring tuition costs, which have priced many Kentucky students out of a chance to better themselves and their state.

Yet, Bevin wants to cut universities by another 9 percent over the next two years. If that happens, state support of higher education will have fallen by 35 percent between 2008 to 2018, when adjusted for inflation. Is that any way for a state to compete in a knowledge-based global economy?

Once Bevin and lawmakers pass whatever bad budget they can agree on, the rest of us must increase pressure on them to fix Kentucky’s tax system before the next two-year budget must be written.

Here’s how to begin: Analyze every tax loophole and begin eliminating those without demonstrable economic benefit to the overall economy. Re-examine pension benefits for future state employees, and eliminate pensions for future legislators. Start taxing many services. Examine tax fairness across income brackets. Raise the cigarette tax again, not so much to generate revenue but to cut future health care costs.

Don’t let tax reform be derailed by people who claim Kentuckians are already over-taxed. Comparisons with other states show we are not.

And ignore people and lobbying groups that say we just need to cut spending and taxes to spur economic growth. In states that have tried that “smaller government” approach, such as Kansas and Louisiana, the results have been catastrophic — huge budget deficits, cuts in vital state services and less economic growth rather than more.

Tax reform in Kentucky will be hard, painful and politically unpopular. But so will continuing to ignore the problem.