Bolstered reserves, lower tax burden increase Kentucky’s competitiveness

Editor’s Note: The Bluegrass Beacon is a weekly syndicated newspaper column posted on the Bluegrass Institute’s website after being published by newspapers statewide.

Lawmakers made solid progress in improving Kentucky’s economic competitiveness during the final days of this year’s General Assembly session before adjourning for a two-week veto period.

For one, they held firm against calls to lighten the commonwealth’s Budget Reserve Trust Fund by spending excessively on new government programs.

Instead, they put a record $1.75 billion into the fund to offset the impacts of future revenue declines and provide stability through the ups and downs of the economy and during future emergencies.

This amounts to more than 40 days of expenses – a vast improvement over the situation in the early days of COVID-19 just a couple of years ago when the state had only about four days’ worth of reserves.

It’s wiser stewardship of these momentary dollars than using them to create new programs or expand existing ones, which would likely result in major tax increases or painful cuts in future years when surpluses and one-time pandemic relief funds aren’t available.

Credit Rep. Jason Petrie, R-Elkton, and Sen. Chris McDaniel, R-Ryland Heights, for providing the leadership in their respective chambers to produce one of the more responsible budgets in modern history.

It’s not perfect, though.

Legislators just couldn’t help themselves when it came to continuing to fund Kentucky Wired – the state’s broadband boondoggle – and to allowing state police to use a sick day benefit to spike their pensions.

Plus, there’s still concern about some hike in the state’s gas tax.

However, those on the left side of Frankfort’s political aisle should remember that it’s the consistent conservatism over the past few years which has helped improve our fiscal picture, allowing Kentucky to move beyond budget discussions dominated by struggles to fund pension and Medicaid obligations.

This year, legislators passed a two-year, $32 billion budget that includes raises for state workers and troopers and provides record funding to school districts, allowing them to bump up teachers’ salaries and spend on other needs they deem appropriate.

This approach aligns with Petrie’s repeatedly made point that school districts, not state government, employ teachers and therefore should handle raises instead of having to cope with another one-size-fits-all mandate from Frankfort.

Lawmakers also built a path toward reducing and finally eliminating the state’s personal income tax and, most importantly, lowering taxpayers’ overall burden.

A new Wallet Hub comparison of individuals’ tax burdens among the 50 states adds to the growing mountain of data showing that states relying more on consumption – or sales – taxes are more economically robust than those like Kentucky with its current reliance on taxing income, which punishes and thus discourages productivity.

The comparison claims Kentucky has the nation’s 10th-highest individual income tax burden when 

considering “the proportion of total personal income that residents pay toward state and local taxes.”

According to the survey, Kentucky has a higher personal income tax burden than any of our neighboring states – including even Virginia with its District of Columbia metro area – and surpasses individual loads in others like North Carolina and Alabama we compete with for economic growth and development.

The survey also reminds: not all types of taxes carry an equal burden.

While Tennesseans pay a higher proportion of their incomes in sales and excise taxes than Kentuckians, the Volunteer State’s overall tax burden is No. 49 – second-lightest in the nation.

A lower income tax even with higher consumption taxes is a much more pro-growth combination and results in considerably lower overall burdens on taxpayers than a heavier reliance on personal income taxes.

The tax reform policy offered by Kentucky’s lawmakers balances the urgency of ceasing to punish productivity and discourage growth with the need to ensure adequate funds are available to properly support state government and keep that rainy day fund strong.

Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free market think tank. Reach him at jwaters@freedomkentucky.com and @bipps on Twitter.