Using the Federal Income Tax Cuts to Help Address Kentucky’s Budget Challenge

The federal tax compromise passed by Congress in December included extensions to income tax cuts resulting in over $1 billion in tax breaks to the wealthiest 5 percent of Kentuckians in 2011. Making state income tax changes to reinvest just a portion of these breaks in Kentucky could help protect public investments in education, health and other necessities.

Federal Income Tax Cuts

Kentucky Exempts More Than It Takes In

Special Tax Breaks and Preferences a Big Drain on Kentucky’s Budget

Special Tax Breaks and Preferences a Big Drain on Kentucky’s Budget

Report identifies ways to more closely scrutinize “tax expenditures”

A new report, “Reforms Needed to Bring Greater Scrutiny to Tax Expenditures,” notes that Kentucky loses billions of dollars in revenue each year through provisions in the state tax code known as tax expenditures, yet does little to understand the effectiveness of these provisions.

“Special tax breaks and preferences result in billions of dollars in lost revenue at a time when Kentucky struggles to protect investments in key public necessities,” said Jason Bailey, Director of the Kentucky Center for Economic Policy. “Yet these holes in the tax code receive far less scrutiny than spending in the state budget. Kentucky has made painful budget cuts the last couple of years, but has done little to more closely scrutinize its tax expenditures.”

Kentucky’s budget office produces a document that identifies tax expenditures and estimates the lost revenue every two years, and their most recent report contains 287 tax expenditures. Significant tax expenditures include those related to businesses and economic development, the exclusion of services from the sales tax and other sales tax exemptions, the variety of income tax deductions and the state’s limitation on the property tax.

Addressing tax expenditures is central to good tax reform. Yet the state lacks the systems to understand the purpose of many tax expenditures, assess their effectiveness and make regular and informed decisions about whether  individual tax expenditures are worth the lost revenue.

“We need to put tax expenditures on a more even playing field with the public necessities and investments that tax dollars pay for,” said Bailey. “The commonsense reforms included in this report will move us in the right direction and help us make better choices about our fiscal and economic future.”

Recommendations in the report include identifying who benefits from particular tax expenditures; creating a tax expenditure review committee to regularly assess the effectiveness of tax expenditures; requiring many tax expenditures to expire at least once a decade; mandating that the Executive Branch make recommendations about reviewed tax expenditures as part of its budget proposal; and creating cost caps on some tax expenditures.

The report, titled “Reforms Needed to Bring Greater Scrutiny to Tax Expenditures,” can be accessed here.

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The Kentucky Center for Economic Policy (KCEP) was founded in 2011 with the purpose of conducting research, analysis and education on important state fiscal and economic policy issues. KCEP seeks to create economic opportunity and improve the quality of life for all Kentuckians. The Center is an initiative of the Mountain Association for Community Economic Development (MACED) and is supported by foundation grants and individual donors.

Reforms Needed to Bring Greater Scrutiny to “Tax Expenditures”

Every year Kentucky loses billions of dollars in revenue through special tax preferences and breaks for individuals
and businesses that are written into the tax code. Yet there is very little understanding or awareness of these provisions, which are known as tax expenditures, and almost no review and assessment of their effectiveness. Tax expenditures receive far less scrutiny than spending in the state budget, and once put into the tax code tend to stay there. When many vital state services are being reduced in tough economic times, as is the case today, tax expenditures tend to escape such cuts. A series of common-sense reforms would shed greater light on the purpose, impact and effectiveness of the state’s tax expenditures and help Kentucky make better choices about key priorities in the future.

Tax Expenditures.pdf

A New Voice in Kentucky Public Policy Debates

End of Recovery Act Funds Could Mean Serious Budget Challenge for Kentucky

Brief Shows Recovery Act Funds Making Major Difference in Kentucky’s Budget

End of funds presents budget challenge for the Commonwealth 

A new report shows that Kentucky’s budget situation would have been much worse without the $3.4 billion in funds provided to the state through the American Recovery and Reinvestment Act over the last few years. The approaching end of these funds in an economy that is only beginning to recover presents Kentucky with a looming budget challenge.

“Kentucky relied heavily on Recovery Act dollars to plug holes in the 2009-2010 state budget and to craft a balanced budget in 2011-2012,” said Jason Bailey, Director of the Kentucky Center for Economic Policy. “Those funds dry up this year, however, at a time when the economy remains in a deep hole.”

Recovery Act funds helped support existing state programs in Medicaid and education in addition to providing supplementary dollars in a range of areas—from transportation and public safety to energy, social services, and environmental protection. These monies helped fill budget holes, stimulate the economy and provide needed investments.

However, those funds are now winding down at the same time that the economy is only beginning to recover from a deep recession, recent budget-balancing acts have passed costs on to future years and additional federal help seems increasingly unlikely.

“It’s time for us to prepare for the end of Recovery Act funds and the serious possibility that we will have a hard time balancing our next budget without new revenues,” said Bailey. “That means ramping up the conversation about long-needed reforms to Kentucky’s tax system that would make it more progressive, adequate and able to sustain revenue over the long term.”

The brief, which includes detailed information about where Recovery Act dollars have been allocated, can be accessed here: End of Recovery Act.pdf.

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The Kentucky Center for Economic Policy (KCEP) was founded in 2011 with the purpose of conducting research, analysis and education on important state fiscal and economic policy issues. KCEP seeks to create economic opportunity and improve the quality of life for all Kentuckians. The Center is an initiative of the Mountain Association for Community Economic Development (MACED) and is supported by foundation grants and individual donors. 

 

End of Recovery Act Funds Could Mean Serious Budget Challenge for Kentucky

Kentucky’s budget situation would have been much worse without the $3.4 billion in funds provided to the state through the American Recovery and Reinvestment Act. But Recovery Act dollars are coming to an end while state revenues are only beginning to recover, unemployment is expected to remain high for some time, budget balancing acts have passed costs to future years and additional federal help seems increasingly unlikely.

End of Recovery.pdf

MACED Launches Economic Policy Center

“MACED Launches Economic Policy Center”