Pension systems underfunded, state agency budgets cut, but Kentucky's budget gives away $13 billion in tax exemptions and breaks; several proposals aired on tax reform to shore up pensions
Glasgow Daily Times, Sept. 22, 2017
Ky. legislators give away billions in tax exemptions
By RONNIE ELLIS , CNHI News Service
Even as lawmakers appropriated too little money for Kentucky’s public pensions over 20 years, they gave away — or left uncollected — billions in revenue in the form of tax breaks and exemptions.
Depending on which set of actuarial assumptions one uses, Kentucky’s pension systems now face unfunded liabilities ranging from $40 to $60 billion. Lawmakers and two successive governors have enacted eight years of budget cuts to most of state government. Some agency budgets have been cut 40 percent or more and in that same time college tuition doubled.
But while the state operates on a $10.5 billion annual General Fund budget, it gives away $13 billion in “tax expenditures” — tax exemptions for the alcohol beverage, coal, horse, agriculture and other industries as well as individual and corporate tax breaks.
Gov. Matt Bevin plans to call a special session this fall to enact changes in the pension system that could include benefit changes. His budget director, John Chilton, is asking state agencies to prepare for another round of cuts, perhaps as high as 17.4 percent to produce $350 million in savings, $150 million of which Bevin wants to put into reserves.
Chilton says without changes to pension benefits, lawmakers need to find an additional $700 million to fund the pension systems, prompting many state employees, teachers and retirees to call for increasing state revenues.
Bevin also wants lawmakers to reform the tax code, either in the 2018 General Assembly, which convenes in January, or in a second special session. While he hasn’t provided specifics, he’s indicated he’d like to reduce and, over time, eliminate corporate and individual income taxes while applying “consumption” or sales taxes to some areas not presently taxed.
Some of the exemptions are popular: there’s no sales tax for food, which costs the state $524 million annually, according to updated data from the Office of the Budget Director, which compiles a report called the Tax Expenditure Analysis. Another politically popular exemption is for prescription medicines, surrendering about $588 million each year.
But there are others that offer potential for substantially higher revenues. The largest is in individual income taxes: $5.4 billion, a little more than $1 billion of which is due to untaxed retirement income. The $5.4 billion equals nearly half the annual General Fund. Another $336.6 million of corporate income taxes aren’t collected.
The state does not collect sales taxes on legal or accounting services, car repairs, landscaping services, or sales of poultry, alpacas, llamas, buffalo, agricultural feed, seeds or fertilizer. In all, the budget office estimates exempted taxes on services equals roughly $2.7 billion.
“There are so many holes in (the tax code) that you can generate a lot of money by ending some of those tax expenditures,” said Jason Bailey of the Kentucky Center for Economic Policy.
Bailey suggests the state could generate between $500 million to $1 billion without touching things like food or prescription drug exemptions.
But Republican lawmakers want to reduce income taxes and replace them with “consumption taxes,” although they haven’t released a specific proposal yet.
House Majority Leader Jonathan Shell, R-Lancaster, said Republicans want to enact a comprehensive reform that promotes economic and job development and provides sustainable revenues over time. He said Republicans don’t want to just raise some taxes and lower others “here and there but look at the whole system and do a comprehensive reform so that we are in a different system than where we are now.”
Shell said his colleagues want to tackle pension reform before dealing with taxes “so we know what the hole is first.”
Senate President Robert Stivers, R-Manchester, doesn’t see “a linkage between the pensions and tax expenditures,” although he said some could be addressed as part of tax reform. He said the Senate is focused on creating a tax structure that will promote business, industry and job creation.
Critics of the Republican approach warn that when Kansas attempted a similar change in its tax code five years ago revenues dropped dramatically, producing an $850 million shortfall.
Kansas had to make deep cuts to services, including education, and its legislature reversed course this past June, reinstating some business and corporate taxes. Shell said Kansas probably moved too quickly and Kentucky Republicans are likely to propose a more deliberate transition.
Bailey said Kentucky’s major revenue producers are income and sales taxes and most income growth is occurring in the upper-income levels.
“Blue collar people’s incomes have not been going up, so their consumption isn’t growing,” Bailey explained. “The income growth is at the top and they don’t spend a lot of that growth — they save it. So you have to have income tax to capture the growth.”
Rep. Jim Wayne, D-Louisville, is a proponent of tax reform more in line with Bailey’s ideas. He has pre-filed a bill that he says will make the tax code fairer while generating more than three-quarters of a billion dollars in new revenues for pensions, education and infrastructure.
He would create more income tax brackets, lowering rates below $8,000 annual income and increasing them slightly for incomes of more than $150,000 with a top rate of 6.5 percent. He’d also tax non-Social Security retirement income above $20,000 and cap deductions at $17,500. Those changes would produce about $445 million.
He’d increase corporate taxes by $88 million and extend the sales tax to “luxury services” like country club membership and green fees, landscaping, limousine services and janitorial services, bringing in another $104 million. Wayne would raise another $155 million through increased tobacco taxes.
Democratic representatives Dennis Keene of Wilder and Rick Rand of Bedford have pre-filed a bill to allow casino gaming if voters first approve a constitutional amendment. Sen. Julian Carroll, D-Frankfort, wants to allow sports wagering at horse tracks.
Democrats’ ideas, however, aren’t likely to get much support from the Republican majority.
Examples of “tax expenditures” and annual costs to the state:
Alcohol Beverage Taxes, $6.7 million
Bank Franchise fees, $5.2 million
Coal Severance Taxes, $2.3 million
Corporate Income Taxes, $336.6 million
Individual Income Taxes (includes exemptions on retirement benefits), $5.4 billion
Limited Liability Entity Taxes, $100 million
Property Taxes, $723 million
Sales Taxes (including food, $524 million, and prescription medicines, $588 million), $3.3 billion
Excluded services:
• Legal, $133.8 million;
• Auto repairs, $146.9 million
• Amusement/Recreation, $41.7 million
• Advertising, $53.1 million
• Engineering and Accounting, $308 million
Tobacco Taxes, $1.2 million
Economic/Job Development, $382.7 million
Retirement income:
• Employer Pensions, $572 million
• Social Security, $338.6 million
• Private Pensions/IRAs, $506.7 million
• State Employee Pensions, $76.9 million
SOURCE: Tax Expenditure Analysis, Fiscal Years 2016 – 32018, Office of State Budget Director
Posted: Friday, September 22, 2017