Public Life Advocate

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The State Budget

by Rodney Berry

The total needs and wants for the 2006 legislature as set forth by officials and analysts in education, health and human services, justice and corrections, economic development and the state employee-teacher retirement system: more than $2 billion. Some respond that requests are inflated by officials who recognize that it is unusual, even in good times, for agencies and projects to receive the full amount requested.

How should Kentucky respond to these needs, these requests?

Within the context of a “revenue neutral” budget framework and a “no new taxes” climate, what can be done?
Should officials reduce government services and shift funds to priority areas?
Does state government have a spending and inefficiency problem or a revenue problem?
How should legislators balance the budget? We examine the following options:

Option 1: Cut the bureaucracy

Surplus funds available at the end of the current fiscal year would nearly cover the Medicaid shortfall, but there are other priority needs and Gov. Fletcher is committed to rebuilding the Budget Reserve Trust (“Rainy Day”) Fund.

Consequently, this option calls for further reductions in state government. Agency budgets would be trimmed with across-the-board reductions. There would be a continued emphasis on eliminating waste, fraud and abuse. The fundamental role of government would be re-examined and the bureaucracy dismantled when warranted.

Those who favor this option may say	Those who oppose this option may say
State government is too large and inefficient, and there are far too many unnecessary and repetitive state programs. The Fletcher administration inherited a deficit, but still managed to end its first year with a surplus by making painful cuts, reducing the number of cabinets, and saving millions of dollars through more efficient management. Less government means less regulation and less taxation – all of which is attractive to business, investment, and job creation. When government is downsized, taxpayers keep more of their money to spend, save, invest and recycle into the economy.	Kentucky is not an overtaxed state (38th in total tax burden) and cannot cut its way to progress. Kentucky’s educational rankings have dropped on a parallel track as a billion dollars has been cut from the budget since 2001. The needs are obvious, if not overwhelming. If we want to set standards of excellence and compassion – in education, health care, human services, and a futuristic economy – we must make the necessary investments. You get what you pay for. Smart investments (e.g., early childhood development, drug prevention/treatment) will save money for state government in the long term.

Those who favor this option may say

Those who oppose this option may say

State government is too large and inefficient, and there are far too many unnecessary and repetitive state programs.
The Fletcher administration inherited a deficit, but still managed to end its first year with a surplus by making painful cuts, reducing the number of cabinets, and saving millions of dollars through more efficient management.
Less government means less regulation and less taxation – all of which is attractive to business, investment, and job creation.
When government is downsized, taxpayers keep more of their money to spend, save, invest and recycle into the economy.

Kentucky is not an overtaxed state (38th in total tax burden) and cannot cut its way to progress.
Kentucky’s educational rankings have dropped on a parallel track as a billion dollars has been cut from the budget since 2001.
The needs are obvious, if not overwhelming. If we want to set standards of excellence and compassion – in education, health care, human services, and a futuristic economy – we must make the necessary investments. You get what you pay for.
Smart investments (e.g., early childhood development, drug prevention/treatment) will save money for state government in the long term.

Option 2: Increase Taxes

This option calls for taxes to replenish at least some of the revenue base that has been depleted from the 26 tax cuts implemented since the 1990’s. Proponents point to several apparent opportunities: cigarette tax increase, corporate tax adjustments and closing of loopholes, sales tax on services, a progressive income tax, increase in coal severance tax, preservation of the state estate tax and others.

Those who favor this option may say	Those who oppose this option may say
In 2005, the cigarette tax was increased from three cents to 30 cents per pack, but Kentucky’s tax is still the fifth lowest in the nation. To bring it to the national average, another 62 cents would need to be added to the tax. This would generate $279 million annually and potentially reduce youth smoking and health care costs. The 2005 tax modernization package did not expand the sales tax to services (such as advertising, attorney’s fees, etc.), the economy’s fastest growing sector, nor did it establish a progressive income tax by increasing the rate paid by Kentucky’s wealthiest citizens. Corporate net profits taxes were lowered by 27 percent last year and many loopholes remain. In 1990, corporate taxes produced twice as much as a percentage of the state budget. Taxes are investments in the future, the fuel for education which is the engine for economic growth. Taxes are a factor, but businesses – particularly those that pay well – are attracted to communities with exceptional schools and a high quality of life.	Low taxes stimulate growth. Why do 80 percent of the discharged soldiers from Ft. Campbell choose Tennessee over Kentucky for their home? It’s obvious: low taxes. Tennessee has no income tax. Kentucky is a low-income, high-tax state that needs a stronger business climate. Corporations don’t pay taxes; people do. Corporate taxes are passed along in higher prices. In fiscal year 2006, without raising taxes, the Fletcher administration increased funds for P-12 education, debt service for new school construction, postsecondary education and Medicaid. Increased cigarette taxes have a detrimental effect on retail sales to out-of-state customers along Kentucky borders.

Those who favor this option may say

Those who oppose this option may say

In 2005, the cigarette tax was increased from three cents to 30 cents per pack, but Kentucky’s tax is still the fifth lowest in the nation. To bring it to the national average, another 62 cents would need to be added to the tax. This would generate $279 million annually and potentially reduce youth smoking and health care costs.
The 2005 tax modernization package did not expand the sales tax to services (such as advertising, attorney’s fees, etc.), the economy’s fastest growing sector, nor did it establish a progressive income tax by increasing the rate paid by Kentucky’s wealthiest citizens.
Corporate net profits taxes were lowered by 27 percent last year and many loopholes remain. In 1990, corporate taxes produced twice as much as a percentage of the state budget.
Taxes are investments in the future, the fuel for education which is the engine for economic growth.
Taxes are a factor, but businesses – particularly those that pay well – are attracted to communities with exceptional schools and a high quality of life.

Low taxes stimulate growth. Why do 80 percent of the discharged soldiers from Ft. Campbell choose Tennessee over Kentucky for their home? It’s obvious: low taxes. Tennessee has no income tax.
Kentucky is a low-income, high-tax state that needs a stronger business climate.
Corporations don’t pay taxes; people do. Corporate taxes are passed along in higher prices.
In fiscal year 2006, without raising taxes, the Fletcher administration increased funds for P-12 education, debt service for new school construction, postsecondary education and Medicaid.
Increased cigarette taxes have a detrimental effect on retail sales to out-of-state customers along Kentucky borders.

Option 3: Eliminate exemptions and loopholes

The Kentucky tax code, which generates $8.1 billion for the General Fund annually, exempts many individuals and groups that otherwise would bring in $6.4 billion.

Many of these exemptions are popular and considered appropriate – for example, the sales tax exemption on groceries. Other exemptions are unpopular. There are nearly 70 exemptions to the sales tax. Other exemptions, such as economic development incentives, are considered excessive by some analysts. Some project that closing corporate loopholes alone would raise $300 million per year.

Those who favor this option may say	Those who oppose this option may say
Special interest groups and influential lobbyists have been behind the passage of most of the exemptions and loopholes. What is good for certain industries and professional groups is not always fair or in the best interest of the public. An objective, non-partisan review of exemptions is needed.	The legislature needs to have flexibility in adjusting the tax code to respond to constituent needs and requests. Exemptions are considered after cost-benefit analysis and thorough debate at the committee level and the floor of the legislature. Exemptions can be valuable tools to stimulate the economy, create jobs, and lighten the financial burden on the poor.

Option 4: Allow more gaming

Once again, the General Assembly is considering legislation to place casino gambling on the ballot for a voter referendum. The horse track industry anchors the effort and seeks to be awarded exclusive sites, but some communities – such as Owensboro – are fighting hard to be eligible as well.

Gov. Fletcher does not personally support expanded gambling, but says he will not stand in the way of the legislature. Some legislators think the governor’s leadership is essential for passage.

Those who favor this option may say	Those who oppose this option may say
Kentuckians already spend more than $1 billion on gambling trips every year outside the state. Kentucky can no longer continue to lose revenue to Indiana and Illinois, where casinos are legal. In 2002, Indiana casinos generated $2.1 billion in sales, 16,500 jobs and $545 million in taxes. Casinos at Kentucky’s eight horse tracks will attract 14 million people. This will strengthen Kentucky’s signature industry that employs 53,000 people and makes a $3.4 billion annual economic impact. Last year, race tracks offered $400 million annually to state government for casino licenses. Opposition on moral grounds is weak: Kentuckians already gamble at race tracks, at bingo halls, and with lottery tickets. The public should have a right to vote on this issue; place the issue on the ballot.	Studies indicate that while gaming may generate an infusion of funds in the short term, it hinders long-term growth because it takes money out of the economy. With the new French Lick casino, there will be 11 casinos in Indiana. The market is saturated. Casino taxes could not be used for ongoing programs because the revenues will not be sustainable. Over a three year period, more than 1.5 million new pathological gamblers have been created in the U. S. with a social cost of $40 billion. Counties with casino gambling have an 18 percent increase in bankruptcy filings. As with the lottery, gambling inevitably attracts a greater percentage of low-income people.

Those who favor this option may say

Those who oppose this option may say

Kentuckians already spend more than $1 billion on gambling trips every year outside the state. Kentucky can no longer continue to lose revenue to Indiana and Illinois, where casinos are legal. In 2002, Indiana casinos generated $2.1 billion in sales, 16,500 jobs and $545 million in taxes.
Casinos at Kentucky’s eight horse tracks will attract 14 million people. This will strengthen Kentucky’s signature industry that employs 53,000 people and makes a $3.4 billion annual economic impact. Last year, race tracks offered $400 million annually to state government for casino licenses.
Opposition on moral grounds is weak: Kentuckians already gamble at race tracks, at bingo halls, and with lottery tickets.
The public should have a right to vote on this issue; place the issue on the ballot.

Studies indicate that while gaming may generate an infusion of funds in the short term, it hinders long-term growth because it takes money out of the economy.
With the new French Lick casino, there will be 11 casinos in Indiana. The market is saturated. Casino taxes could not be used for ongoing programs because the revenues will not be sustainable.
Over a three year period, more than 1.5 million new pathological gamblers have been created in the U. S. with a social cost of $40 billion. Counties with casino gambling have an 18 percent increase in bankruptcy filings.
As with the lottery, gambling inevitably attracts a greater percentage of low-income people.

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