By Ronnie Ellis / CNHI News Service
In the past five years, Kentucky lawmakers have cut the state budget by $1.6 billion. But if something doesn’t change, they may have just begun to cut services.
According to a report last year by a Blue Ribbon Commission on Tax Reform, “without fundamental reforms, Kentucky could face a $1 billion shortfall by 2020.”
That’s why Gov. Steve Beshear wants the General Assembly to adopt the commission’s recommendations to reform the tax code.
“I am still interested in implementing comprehensive tax reform to help address the future needs of the Commonwealth, especially for our children and their education,” Beshear said.
Despite those budget cuts of $1.6 billion, the governor said the state must also look at the revenue needs to fund critical services.
Lawmakers are typically skittish about anything which could be characterized as a tax increase and they are especially so in an election year like 2014.
Rep. Jim Wayne, D-Louisville, a non-voting member of the commission and longtime proponent of tax reform, advises Beshear not to wait until 2014.
“The best procedure would be for the governor to lobby for reform over the summer and call a special session after he has the votes lined up,” Wayne said.
In January, Wayne said, lawmakers will be trying to put together a two-year budget which would be significantly easier if they know what revenues will be available through any tax reform. It will be difficult to do both at once, he said.
Critics of Kentucky’s current tax code say it’s based on an outdated manufacturing economy and isn’t “elastic” — it doesn’t grow parallel to the economy. Some like Wayne think it’s too regressive, taxing lower income groups at a higher percentage of their income than the more affluent.
Meanwhile, Wayne says, those budget cuts are crippling critical services.
“The infrastructure is just crumbling, especially in health and human services,” Wayne said.
While lawmakers are sometimes reluctant to take up tax reform, they’re frequently happy to pass exemptions on various taxes for constituents or special interests. The Governor’s Office of Economic Analysis and Office of Budget Director published a report on “tax expenditures,” defined as “a tax revenue reduced because of a specific statute.”
The report says tax expenditures or exemptions are seldom evaluated or reviewed after passage.
“Tax expenditures are approved by the legislature and then become a permanent part of a state’s tax laws until modified by future sessions of the General Assembly. As a result, tax expenditures have a tendency to become an increasingly larger part of state government expenditures without explicit approval by succeeding legislatures.”
The report estimates the state foregoes about $2.7 billion in revenue by exempting a long list of products and sales. That’s more than the budget cuts of the past five years plus the anticipated $1 billion budget shortfall between now and 2020 in the absence of tax reform.
The report cautions that those numbers are estimates and repealing exemptions can affect other consumer behavior and taxes – so the figures don’t provide a precise indication of what might be available.
And Jason Bailey, Director of the Kentucky Center for Economic Policy based in Berea and a member of the tax commission, said two of the biggest exemptions are for food and prescription drugs, things the public isn’t likely to want to give up.
Food sales tax exemptions account for nearly $500 million in sales tax exemptions in the current year and prescription drugs nearly $400 million, according to the tax expenditure report.
Bailey said taxing food for home consumption would be “very, very regressive, one of the most regressive taxes I could think of.” That’s because lower income groups spend a higher percentage of income on food.
But there’s another reason Bailey thinks taxing food isn’t a good idea: overall as a society the trend is to “spend less and less income on groceries so as a long-term issue, revenue won’t grow.”
But even if the roughly $900 million is deducted from the uncollected sales taxes, it still leaves a pretty hefty amount.
Among the items which are exempted from sales and use taxes are llamas and alpacas, buffalo, feed, seed, embryos and semen; several forms of farm equipment; charter bus repair parts; jet fuel; railroad locomotives; machinery for new or expanded industry; sales to motion picture companies; tombstones; horses purchased for breeding; passenger aircraft, parts and supplies; and coal used in generation of electricity. And those are just a small sample from a long list.
They’re all there for a reason and a case can be made for many — to bolster the agriculture economy or the horse industry or manufacturing industries which may employ more workers.
But Wayne says most are the result “of wheeling and dealing and none of them is justified or regularly evaluated.” He suggested the tax commission recommend a sunset provision for all exemptions “unless the industry could document an economic benefit – otherwise, it’s just a give-away.”
His suggestion was rejected.
Beshear and Bailey held out hope Congress will pass a law allowing states to collect sales taxes from internet sales. Current law requires only those companies with a physical presence in the state to pay those taxes. The U.S. Senate approved such a measure Tuesday but it faces an uncertain reception in the House.
Bailey suggested the law could generate as much $130 million to $200 million in new revenue for Kentucky.
RONNIE ELLIS writes for CNHI News Service and is based in Frankfort. Reach him at firstname.lastname@example.org. Follow CNHI News Service stories on Twitter at www.twitter.com/cnhifrankfort.