Next Ky. budget should close tax loopholes to fill deficits

Published 6:56 am Saturday, February 10, 2018

By JANE PRESTON

Guest columnist

According to statistics provided by the Kentucky Center for Economic Policy, Kentucky’s revenue sources are inadequate, outdated and unfairly collected. Although state revenue is affected by economic conditions and federal funding, it is also influenced by state tax code rates and exemptions, which haven’t been revised in 30 years.

Current revenue does not meet the demands created by inflation and rising health care and correction costs. Yet, during this same time period, legislators have acted more than 40 times to increase select economic tax breaks, many times with no oversight requirements to evaluate economic return values.

The state has relied on fund transfers and budget cuts to meet revenue needs. Citizen needs, not political ideology, must drive overdue funding reform. The state has federal funds, bond funds, tobacco settlement funds and road funds, all marked for restricted use. The bulk of the state’s general-fund money comes from individual income tax and sales tax. Coal Severance tax provides 1 percent; lottery and cigarette taxes provide 2 percent; property tax provides 6 percent; and corporate income tax provides 7 percent.

About 17 percent of the general fund is spent on Medicaid; 11 percent on criminal justice; 7 percent on human services; 10 percent on post secondary education; and 45 percent on P-12 education (with 60 percent of that money going directly to students).

Currently, the state’s budget reserve “rainy day fund” is far below the statutory goal of 5 percent of general fund revenues and will likely be depleted this year. Budget cuts of 29 percent to 35 percent for the state auditor, attorney general and secretary of state jeopardize the state’s ability to protect consumers and monitor the spending of public dollars.

Reductions to the Energy and Environment Cabinet restrict monitoring of air quality, solid waste and hazardous waste. State police, corrections programs, college faculty and the judicial branch face staffing cuts, which hamper effective program implementation and, in some cases, threaten federal funding. 

Local communities struggle to meet county jail and school transportation costs, shifted from state responsibility.

The lowest paid citizens pay the most for this inadequate tax system, both in costs and services. Contrast the two lowest-earning groups, which pay tax rates of 9 and 10.8 percent, with the top two highest-earning groups, which pay 7.4 and 6 percent. Average annual income for Kentuckians paying the 6-percent rate is $1.3 million. From 1979 to 2014, income growth for this top group has grown by 76.2 percent, while the bottom 99 percent of taxpayers’ incomes has dropped by 1.7 percent. People are on waiting lists for Meals on Wheels, health home assistance programs, child care centers, and legal aid assistance. 

Eligibility for preschool without tuition has been restricted to those below 160 percent of the poverty level, down from 150 percent. The state’s payments to higher education have declined from 63 percent to 44 percent of college budgets, passing the increased average tuition costs to students and their families.

Here are some (not all) workable solutions to meet revenue needs and fairly distribute funding responsibility, as suggested by the Institute of Taxation and Economic Policy, the Legislative Research Commission, and the Kentucky Center for Economic Policy.

• Raise the cigarette tax to $1.60, add e-cigarettes to the other tobacco products tax base and raise that tax to be commensurate with the cigarette tax, generating $155 million.

Currently, Kentucky’s cigarette tax is the 43rd lowest among the states. 

• Reduce dealer’s compensation for collecting and remitting motor fuels tax to 1 percent from 2.25 percent, generating $21 million. This compensation has not been reduced to reflect technological changes making dealers’ jobs easier.

• Enact a circuit breaker on property tax, creating indeterminable savings. A circuit breaker reduces property tax for people below a certain income level when property taxes exceed a certain portion of income. More than 33 states have these measures, which are less costly than Kentucky’s current blunt cap on property tax growth. This would require a constitutional amendment.

• Repeal the $10 individual income tax credit — $33 million.

• Simplify filing by having married couples file joint returns — $73 million.

• Repeal the exemption for pollution control facilities — $32.5 million. 

• Repeal an exemption for tombstones and grave markers — $8.5 million.

• Repeal an exemption for vessels and maritime supplies — $6.4 million.

• Close loopholes by enacting combined reporting and a throwback rule for corporations — $66 million. 

Twenty-four states with corporate taxes have enacted combined reporting, preventing large corporations from reporting profits in ways that evade state taxes. Kentucky loses at least $50 million annually by not requiring combined reporting and by not disallowing tax haven transactions.

• Create a review for all business tax break programs, requiring sunset dates and reauthorization — up to $361 million.

• Currently, Kentucky’s top large income tax rate is 6 percent, lower than 31 other states. Create an income tax rate of 6.5 percent at $100,000 and 7 percent at $250,000, and phase out lower rates for incomes $250,000 to $300,000 — $130 million.

• Phase out the retirement exclusion for federal Adjusted Gross Income between $80,000-$100,000 yearly — $176 million.

Retirees with an AGI of up to $80,000 will still receive the entire $41,110 exemption; those over $100,000 will get no exemption; and for those between 80,000 and 100,000, the exemption would be phased out by about $2 for every $1 earned over $80,000.

By the end of February, the proposed two-year budget will be out of committee and up for a vote where a majority in both the House and Senate is required for passage and takes effect on July 1. The time is now to contact your state representative, Daniel Elliot and state senator, Rick Girdler about your concerns. Without public pressure, I fear Kentucky legislators will delay these thorny issues until our choices are too limited and the consequences are dire. 

We’ve seen how putting off action threatens pension systems and health insurance benefits for public employees. Let’s be proactive, not reactive and plan for a thriving future Kentucky.

Jane Preston is a retired educator. She lives in Danville.