If there’s one big question lingering here as a springtime lull takes hold of the Kentucky Capitol, it’s this: is the legislature going to overhaul the state’s tax code in a special legislative session this year?
Leaders of the House and Senate are shrugging.
“The governor says it is,” said House Speaker Jeff Hoover, R-Jamestown. “He says he’s going to call a special session.”
“This is probably going to be one of the most difficult things that any governor could do or any legislator could vote for,” said Senate President Robert Stivers, R-Manchester. “But is it insurmountable? No.”
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Gov. Matt Bevin has repeatedly promised in recent public appearances that he will call a special session later this year to change the tax code and fix the state’s financially ailing public pension systems. On Wednesday, a group of legislators and the governor’s advisers met for the first time since the regular legislative session ended in March to discuss a tax overhaul.
Until they see a specific plan, Stivers and Hoover said it’s impossible to predict how lawmakers will react.
“You have to understand that we haven’t seen it, for lack of a better term,” Stivers said of the governor’s plan. “And until you do that, there’s no way I can speculate what the likelihood is of a special session now or whether there’s votes in either chamber. You have to have something concrete before we can do that.”
Stivers and Hoover, though, seem to be on the same page when it comes to the general idea of tax reform. They’d like to see a tax code that encourages businesses to locate or expand in the state, which would broaden the tax base and presumably generate more revenue.
“It has to be good policy for Kentucky that will allow businesses to continue to want to locate here and expand,” Hoover said. “It has to be policy that will allow the tax base to grow and you start with looking at the 400 or so exemptions that we have in our tax code and see which ones of those need to be closed. To me, that’s sort of where we start.”
Collectively, those tax breaks amounted to $12 billion in 2016. In comparison, the state actually collected $10 billion in taxes.
Stivers pointed to recent announcements of large companies locating or expanding in Kentucky as a model to help broaden the state’s tax base.
“We’ve got to take this state from being an employer of 100 people to 200 people,” Stivers said. “We’ve got to broaden that base in the sense that we get more Braidy Industries or we get more Amazons, that we get out in this world and create another 50,000 jobs, that’s how you create more revenue, you create a bigger base.”
Creating a “business friendly” tax system, though, often leans heavily on cutting taxes, a model popularized by economist and Kentucky political donor Arthur Laffer.
Under that model, some of the tax burden is often shifted from corporate and income taxes to consumption-based taxes, such as the sales tax.
Many economists, though, remain skeptical of the claim that cutting income taxes eventually generates more revenue for governments.
In a poll of 40 economists conducted by the University of Chicago in 2012, not one said cutting federal income taxes would lead to more revenue in five years.
Democrats often oppose this approach because it forces lower-income families to spend a larger percentage of their income on taxes than upper-income families.
Currently, Kentucky’s income taxes make up 44 percent of tax receipts and the sales tax makes up 33 percent of receipts.
Regardless of what the governor’s tax plan contains, Hoover and Stivers said it remains in its early stages.
“There is a large period of time that will be needed and devoted to drafting it because it’s complex and technical,” Stivers said.
In his State of the Commonwealth address, Bevin made it clear that he plans to consider eliminating tax “loopholes,” saying there would be “no sacred cows.”
Closing those loopholes, though, means someone’s taxes will go up. Before lawmakers will consider doing that, Bevin must first persuade the public to support his plan, Hoover said.
“I think he’s got to take three months or so and travel around the state and sell his proposal to the public and ultimately to the legislature,” Hoover said. “It’s not something you can put out there one week and have a special session on two weeks later. And I’ve shared that with him and he understands. I’ve made that clear.”
Bevin’s success may hinge on his ability to convince Kentuckians that a looming pension crisis — the state has one of the worst funded public pension systems in the country — will cripple the state’s ability to provide basic services unless more revenue is raised.
“It depends on how the public believes the problem is significant, to what degree does the public thinks this problem is really significant,” Hoover said. “And that comes from the governor selling it to the people of Kentucky that the problem is real, it is significant, it will stifle our economy, it will stifle our budget in the years to come if we don’t do something.”
Outside groups might also help Bevin make his case. Hoover said there is an issues-advocacy group working to raise money to support tax reform.
Meanwhile, Republican lawmakers will remain on the sidelines, unwilling to take any votes that might jeopardize their control of the state House of Representatives.
Republican lawmakers may be even more difficult to convince than the public — their party just gained control of the House for the first time in 95 years.
“It will be difficult for us to support tax increases,” Hoover said. “Again, it comes back to what does the public think?”