It’s past time to fix Kentucky’s tax structure

February 3, 2009

FRANKFORT — Kentucky legislators began their annual session Tuesday in a snowstorm, and that was the least of their worries.

Much of Kentucky is still reeling from last week’s ice storm, which many are calling the biggest and most costly natural disaster in modern state history.

Worse still, the nation’s biggest economic crisis since the Great Depression has helped blow a $456 million hole in the state budget that must be filled by June 30.

To paraphrase our new president, Kentucky’s financial challenges are serious, they are many and they are real. As I stopped to chat with legislator after legislator, many just shook their heads and said there are no easy answers.

“It’s going to be ugly,” said Rep. Reginald Meeks, a Louisville Democrat. “But I look at it as an opportunity for us to show some leadership. The question is, are we going to continue to play politics as usual or do the heavy lifting it takes to improve the lives of Kentuckians in the future? We play politics at our peril.”

Kentucky’s part-time legislators are just like the rest of us: They’re reluctant to do anything unpleasant today that can be put off until tomorrow. But options for further procrastination are quickly disappearing.

Lawmakers face two big challenges. First, they must plug the hole in this fiscal year’s budget, because the constitution requires the budget to be balanced. That’s likely to require a lot of painful cuts to education and social services, as well as some higher taxes, most likely on cigarettes and alcohol.

Gov. Steve Beshear faces an uphill battle on his proposal to raise the state cigarette tax by 70 cents, to $1 a pack, which would raise $81.5 million this year and $144 million next year. The proposal has broad support among the public, education leaders, health advocates and the Kentucky Chamber of Commerce.

Studies consistently show that higher cigarette taxes lead to fewer smokers, which leads to a healthier population and lower long-term health care costs. It’s an economic no-brainer.

Still, some lawmakers are nervous, especially now that congressional Democrats are talking about raising the federal cigarette tax. They fear that poor people addicted to cigarettes will buy them anyway, no matter what the tax is, and that will hurt families.

But at some point Kentucky lawmakers must decide what they value: Education and health or cheap smokes.

Once the immediate crisis has passed, lawmakers must find a long-term fix for a tax system that doesn’t work in a 21st-century economy. They’ve known it doesn’t work since at least 2001, when an independent economist predicted the rising budget deficits the state has seen since the mid-1990s.

What’s the long-term fix? There are two competing visions, neither of which is likely to get much of a hearing until the 2010 regular session or a special session on tax reform.

One is being pushed by Rep. Bill Farmer, a Lexington Republican, who also thinks state spending needs to be scaled back.

Farmer has proposed removing virtually all sales tax exemptions, except on food, and taxing services used by individuals (as opposed to businesses), with the exception of medical care. He thinks that would raise enough revenue to allow the sales tax to be cut from 6 percent to 5 percent — and allow the state income tax to be eliminated.

Critics of Farmer’s approach say a system based on sales taxes would be too “regressive,” meaning it would hit poor people harder than those with higher incomes.

“We don’t have a progressive income tax system,” Farmer counters, noting that Kentucky’s 1950s-era income tax rate is capped at 6 percent for people making more than $8,000 a year, which is virtually everyone.

Jim Wayne, a Louisville Democrat, has a different approach. For the fourth year in a row, he filed a bill Tuesday that would make the state income tax more progressive — and more like the federal income tax system.

Wayne’s plan would raise taxes slightly on people earning more than $75,000 a year and provide a 15 percent earned income tax credit for low-income people. It also would restore the tax on estates worth more than $1 million and add sales tax to services used by wealthy people, such as limousine rides, charter air flights and country club fees.

“This is not a dramatic shift in income tax rates,” Wayne said. But even after the earned income tax credit returned about $90 million to the “working poor” it would increase state revenues by $250 million a year, he said.

No matter what approach lawmakers take, it’s clear they need to do something — and soon. Any change will involve political risk. But, as Wayne said, “The riskiest position is to not fix the system.”

Virginia governor asks to double cigarette tax

December 17, 2008

Kentucky’s Steve Beshear isn’t the only governor in the region looking to shore up a state budget deficit by boosting one of the nation’s lowest cigarette taxes.

Virginia’s cigarette tax is now 30 cents a pack, just like Kentucky’s. But Gov. Tim Kaine plans to ask lawmakers there to double it. Read details here.

Beshear is hoping to raise Kentucky’s cigarette tax by 70 cents, to $1 a pack. How will the response to Kaine’s move affect what happens in Kentucky?

Raise cigarette tax to save taxpayers money

December 16, 2008

It’s a rare occasion when Kentucky legislators can save taxpayers money by raising a tax.

Gov. Steve Beshear’s proposal to raise the state cigarette tax by 70 cents a pack is one of those occasions. The proposal is not only good public policy, it’s a financial no-brainer.

It’s also why a year after Beshear first proposed it — only to see House members cut the increase to 25 cents and Senators kill it — it’s worth trying again.

Beshear’s main motivation for trying again is to get much-needed revenue for state government, which faces a $456 million budget shortfall. The governor estimates the cigarette tax increase would bring in $81.5 million this fiscal year and $144 million next year.

But nobody thinks a cigarette tax will solve state government’s money problems. Many people believe Kentucky needs comprehensive tax reform, which would include taxes on services and more taxing authority for local governments.

The big payoff from raising the cigarette tax isn’t the revenue it would bring to state government, but the long-term savings it would bring to Kentucky taxpayers and businesses.

A lot of people seem to understand that. A statewide poll in May by the Herald-Leader and WKYT-TV showed 55 percent of Kentuckians support raising the cigarette tax to $1, while 34 percent oppose it.

Since then, several powerful groups have endorsed a higher cigarette tax, including the Kentucky Chamber of Commerce, the Northern Kentucky Chamber of Commerce and the Kentucky League of Cities.

Kentucky, which in 2005 raised the cigarette tax from 3 cents to 30 cents, still has one of the lowest rates in the region. Among surrounding states, Virginia also has a 30-cent cigarette tax, and Missouri’s is only 17 cents. The tax is 55 cents in West Virginia, 62 cents in Tennessee; 98 cents in Illinois; 99.5 cents in Indiana; and $1.25 in Ohio.

Kentucky lawmakers will get a lot of pressure from border-county retailers, who make big bucks selling cigarettes to bootleggers who resell them in high-tax states. The chambers of commerce are sensitive to putting Kentucky retailers at a disadvantage. That’s why they would prefer a smaller increase than Beshear is seeking.

But those business organizations also recognize that when cigarettes get more expensive, fewer people smoke. And when fewer people smoke, businesses and taxpayers spend a lot less money treating smoking-related illness.

“Health costs are eating us up in Kentucky,” said David Adkisson, president of the Kentucky Chamber of Commerce, who said a survey of the membership showed 80 percent support higher cigarette taxes to discourage smoking. “Employers’ top concern is heathcare costs.”

Smoking rates in Indiana dropped 20 percent when the state raised its cigarette tax from 44 cents to 99.5 cents in July 2007. Other states have seen similar results.

Kentucky leads the nation in most measures of smoking, including smoking by young people and pregnant women, as well as illnesses linked to tobacco use.

Smoking-related healthcare costs in Kentucky total $1.5 billion a year, with lost productivity in the state attributable to smoking worth about $2.13 billion, according to a study by the Campaign for Tobacco-Free Kids. The study used data from government agencies and the Centers for Disease Control and Prevention.

Because many smokers are poor, smoking-related Medicaid expenses in Kentucky cost state government $145.4 million and the federal government $341.5 million a year. The study estimates smoking’s total burden on Kentucky taxpayers at nearly $985 million a year.

Substantially higher cigarette taxes would prompt more adults to quit smoking, fewer kids to start and save taxpayers and businesses a fortune, said Ellen Hahn, a University of Kentucky nursing professor and anti-smoking crusader. “It’s the single most important thing we could do to reduce consumption,” she said.

Hahn warned, though, that a small tax increase won’t be enough to reduce consumption, because cigarette companies will simply cut their prices and profit margins to maintain sales.

In addition to all of the smoking-related deaths, pain and suffering, Hahn said, healthcare organizations estimate that Kentucky could save more than $1.3 billion in long-term healthcare costs with a 70-cent increase in the cigarette tax.

“That’s the piece that people don’t realize,” she said. “People who aren’t smokers say this doesn’t affect me. But it affects everyone. It’s money out of our pockets.”