Kentucky needs tax reform to stop the annual crisis

The late Sen. Russell B. Long of Louisiana famously described the politics of tax reform this way: “Don’t tax you, don’t tax me. Tax that fellow behind the tree.”

Kentucky needs real tax reform, because what Long described is the way we have funded government for years.

We have known for more than a decade that Kentucky’s tax system is broken, because each year comes with another big deficit. (Government spending has increased, too, but Kentucky’s per-capita state and local spending is almost 20 percent less than the national average, according to the Kentucky Long Term Policy Research Center.)

Economists say annual deficits, even in good times, show that Kentucky needs a tax structure that reflects the modern economy — and one that is fair, equitable, efficient and sufficient to meet the state’s needs.

Recent governors and legislatures have settled for a series of politically expedient quick fixes, usually hashed out behind closed doors and pushed quickly through the General Assembly. And they do it knowing that another crisis is just around the corner.

Think this year’s $456 million shortfall was bad? State officials say it’s nothing compared to what we’re likely to see in the next two years.

Gov. Steve Beshear’s proposal for the current deficit was another quick fix, but at least it made some long-term sense. Beshear proposed raising Kentucky’s incredibly low cigarette tax by 70 cents, to $1 a pack. In addition to raising revenue, he hoped to save millions, if not billions, in future healthcare costs by reducing the high number of Kentuckians who smoke.

Raising the cigarette tax closer to the national average attracted support from a broad coalition of business, health and education groups. But they underestimated the devotion to cheap smokes. A compromised rammed through the General Assembly and quickly signed by the governor Friday raised the cigarette tax by only 30 cents, and made up the difference by adding more tax to alcohol.

The liquor industry cried foul, saying that while Kentucky’s tobacco taxes are among the nation’s lowest, alcohol taxes are among the highest. While the abuse of alcohol certainly has health and social costs, they’re much smaller than those caused by the use of tobacco.

Was the additional alcohol tax fair? Probably not, but it was politically expedient. Nobody could argue that it would be better to slash money for education, healthcare and social services than to raise taxes on alcohol, a discretionary product that many Kentuckians consider evil.

Liquor is always an easy target. Forty-nine of Kentucky’s 120 counties don’t allow alcohol sales, and another 41 place restrictions on it. Rep. Steve Riggs, a Louisville Democrat, suggested that only “wet” counties should receive the benefits of future alcohol taxes. Of course, that idea went nowhere.

Riggs’ proposal was similar to the logic, if not the reality, of the coal-severance tax. Speaking of which, Kentucky’s severance tax rate has been 4.5 percent since the 1970s, smaller than in other major coal-producing states. The tax is 5 percent in West Virginia and 7 percent in Wyoming. Raising Kentucky’s severance tax would seem to be a good idea. But don’t expect it to happen, given many legislators’ allegiance to King Coal.

There have been several studies over the years suggesting ways to improve Kentucky’s tax system. Two legislators have made comprehensive tax reform proposals at opposite ends of the political spectrum that could serve as conversation-starters.

Rep. Jim Wayne, a Louisville Democrat, has proposed making the state income tax more like the federal one by more directly linking tax levels to income levels. He would raise the tax on people earning more than $75,000, while providing a 15 percent earned income tax credit for low- and middle-income people.

Rep. Bill Farmer, a Lexington Republican, has suggested eliminating sales tax exemptions. He says that would simplify the system and bring in enough additional revenue to reduce the 6 percent sales tax to 5 percent and eliminate the income tax, too. Farmer’s plan needs to be analyzed to see if the numbers work, and if it would be fair to poor people.

Both plans would tax some services, something economists say is necessary to keep tax revenues growing with the economy.

With Kentucky’s perpetual budget crisis bandaged up for a few more months, what will our leaders do now? Will they hope for a windfall from the federal economic stimulus? Will they decide that slot machines can make state government richer without making Kentuckians poorer?

What they should do is quit looking for quick fixes and easy answers. Otherwise, they’ll just have to keep dipping into reserve funds, hacking away at vital social services and putting off investments in education and infrastructure that are Kentucky’s only hope for a bright future.

We must get serious about real tax reform. We must create a modern tax system that is fair, equitable, efficient and sufficient. Because even if there is a fellow behind the tree, he’s a Kentuckian.