Sunday, February 8, 2009

solving the fiscal crisis in Kentucky

Kentucky, like 44 other states, is facing a fiscal crisis. Revenue coming from taxes and fees is not enough to cover budgeted expenditures. By law Kentucky cannot do what most people do when faced with this situation which is borrow money. While this is probably a good thing, it means that Kentucky’s legislators have only two choices: cut spending or increase revenue.

Not every penny spent by Kentucky's state government is essential. Governments are run by people, and people sometimes spend money on things we don’t absolutely need. When’s the last time you bought a candy bar or a soda? We all buy things we want that aren't really necessary -- sometimes things that are even bad for us. But state governments -- Kentucky's included -- like us, spends most of its money on essentials, and budget cuts would hurt the essentials.

One of those essentials is education which accounts for nearly forty percent of total Kentucky state spending. Kentucky lags behind much of the U.S. in many areas of education already. In 2004, while less than 15 percent of people over 25 in the country as a whole had not graduated from high school (or gotten a GED), more than 18 percent in Kentucky has failed to attain that important milestone. The gap in college attendance is even greater. In the U.S. as a whole about 28 percent received bachelors degrees or higher, while in Kentucky only 21 percent had done so. Education is clearly not an area that can tolerate cuts if Kentucky wants to compete with other states and other countries for businesses and jobs.

Another essential area is transportation that commands nine percent of the annual budget in the Commonwealth of Kentucky. This has to cover all aspects of transportation from road, bridge and airport construction to maintenance and repair and snow removal. Most people would certainly consider the criminal justice system -- law enforcement, courts, prisons and probation to be essential expenditures, another five percent of the total budget.

Most people are aware of the role of state governments in education, transportation and criminal justice, but they often unaware of other essential state expenditures. Another kind of essential is the state funds given to communities for water and sewer, equipment and training for fire and rescue, flood control and stream improvement, water safety testing, and infectious disease control. If residents of Kentucky were to go to their local fiscal court, town or city council, and ask, I'm sure they'd learn that their local governments depend heavily on funds from Frankfort to provide services and infrastructure necessary for safety, security and health in local communities.

Most people often do not think about the fact that state funded licensing boards to insure the quality of service people we depend upon daily – doctors, nurses, dentists, counselors, barbers, hairdressers, pharmacists, engineers and many others. The news stories about salmonella in peanut butter illustrate what can go wrong when a state (in this case Georgia) does not spend enough on adequate safety testing and enforcement of food safety standards.

The real solution to the crisis is to raise revenues, by raising taxes. In the short run this probably means raising taxes on tobacco products. Kentucky under taxes cigarettes compared to most of the states surrounding it. The increased cost would not only raise revenue, but would encourage more people to quit. But it is a tax that hits low income people harder than others. In the long run the overall structure of taxes in Kentucky needs to be modernized. More tax money has to come from those with the ability to pay more, both in taxes on luxury and business services, reinstating the inheritance tax, and more progressive income tax that raises, slightly, the percentage paid by those with the highest incomes, such as proposed in both Kentucky HB 223 and HB 257.

Currently, Kentucky income tax is essentially a flat tax of 6 percent on all incomes over $8,000. HB223 proposes that individuals (NOT families) with incomes over $75,000 pay an extra 1% (7% instead of 6%) only on the proportion of income that exceeds $75,000 up to $90,000, and individuals with incomes in excess of $90,000 pay an extra 2% (8% instead of 6%) only on the portion of income that exceeds $90,000. In Kentucky all earners pay tax individually even if married -- married couples file separately but on the same tax form. This bill would NOT affect families with incomes of more than $75,000 as long as each individual person's income was less than $75,000. Indeed, families with two earners each making $74,000 (a family income of $150,000) would not be affected by this bill. An individual with an income of $100,000 would pay an extra 1% on the $15,000 between $75,000 and $90,000 (that's an extra $150 dollars), and an extra 2% on the $10,000 between $90,000 and $100,000 (that's an extra $200 for a total of $350 dollars more than they would be paying under the current tax system).

This does not seem like an unreasonable cost given all the benefits and services that we all gain from state government. When people think about who benefits from state spending they almost exclusively focus on the poor. But affluent people benefit as much or more from government spending. Affluent people travel more making more use of highways and especially airports, they make more use of libraries and parks, more likely to go boating on Kentucky lakes. Even if the affluent do not make direct use of public schools, colleges and universities (although a high percentage do), if they are business owners or managers their success in business depends upon subordinates and workers educated in public schools.

The irony is that even the benefits that people identify as "going" to poor people, actually go to middle class and affluent people. Take Medicaid. Poor people do benefit from having a medical card. They receive medical services and medicines that can save their life and keep them healthy. But the poor do not get any money from Medicaid -- the money goes to hospitals, doctors, home health companies, and pharmaceutical companies -- in other words to middle class, affluent and even to rich people (stockholders and executives in medical and pharmaceutical corporations). The majority of money spent on social services doesn't go to poor people, it goes to middle class social workers, therapists, psychologists and other people with graduate educations. It pays the fees, their salaries and their health insurance and pension payments of these middle class workers.

The more affluent you are the more your lifestyle and your economic position depends upon publicly funded resources. So what not pay a (very) small premium for those benefits?


Pat Jenkins said...

sue, though not suprised by your solution to kentucky's woes, i am a bit pessimistic of its workability. i would think, thanks to the bluegrass' weaker wage earners, that tax hikes could cause a depression of sorts! since their own disposable income will be reduced. in making a decision of who suffers, the government, or the people of kentucky, i would assume you would like to see the people keep themselves afloat!

Sue said...

Pat, I don't think that a personal income over $75,000 is "weak wages." The legislation proposed only targets those people who (as individuals) earn more than $75,000. That's a lot more than my family income and we're doing fine -- well "afloat" as you say. There already is a severed depression -- how does it benefit business and workers in Kentucky if our roads are allowed to fall into disrepair, and our law enforcement and prisons are under funded and understaffed, and our children don't learn the skills necessary for jobs in this modern economy? This type of tax reform would be better than cigarette taxes which do hit those at the bottom harder. But then again, smoking cigarettes is something that a person can stop doing -- it is often very hard to do so, but it can be done (I've watched family members and friends successfully quit).

Chris Crawford said...

The point about wealthier people deriving greater benefit from governments is an important one, and one little appreciated by most people. That in itself suggests that simple fairness would require wealthier people to pay a higher share.

However, an even more important consideration, I think, is the value of the Gini Index for Kentucky. There's no question in my mind that the Gini Index for the USA as a whole is dangerously high. But I have no idea of its value in Kentucky. Do you know that number?

Pat Jenkins said...

sue i think it is terribly sad you believe that government should have more than the individaul! and then to believe that that way of thinking is some how compassionate is even more unbelievable!

E. R. Dunhill said...

While I agree that many governments do lots of things government has no business doing, and that we need to reconsider some of the ways we finance government, I'm not sure that what you suggest really follows from what Sue has written. Does a trivial tax increase for upper-middle class and wealthy people really mean that the government has more than the individual?
Functions like transportation, public safety, and education are services that broadly benefit individual members of the community. The government may "own" the road in front of my house and the schools I'll ultimately send my son to, but wouldn't my quality of life be worse without these things? And, I don't mind paying a little bit more than my fair share for this, so that poor kids in my community can go to school.

Pat Jenkins said...

first sue i hope my comment didn't come of as being confrontational, but i am sesensitive to what i am seeing happening with or by your post!.. now erd i know we need a government that uses taxes to provide services. you will never get an arguement from me for that. but what i see as a growing movement among the left is the idea government should be sustained over individuals. and whether that belief is masked behind a "small" tax cut or large one, i believe that "thought" should have no "light" in our society!