While current trends suggest that Kentucky’s General Fund revenue may exceed the official forecast for the year ending June 30, the state’s revenue growth is less than what other states are experiencing.
A new report by Elizabeth McNichol of the Center on Budget and Policy Priorities shows that tax revenue grew 5.7 percent through April in the median state for which data are available compared to 1.9 percent in Kentucky. By the end of May, Kentucky’s growth was still just at 2.2 percent.
Collectively, the personal income tax grew much faster than the sales tax, although Kentucky lagged behind other states in both taxes. The personal income tax grew 5.6 percent in Kentucky through April (and 5.9 percent through May), while the median state’s income tax grew 8.3 percent. Kentucky’s sales tax fell 0.9 percent though April, while the median state’s sales tax grew 2 percent.
The faster growth of income taxes compared to sales taxes can be attributed in part to rapid increase in the incomes of wealthy individuals during the recovery. As with previous recessions, the incomes of the wealthy are recovering before those of low- and middle-income Americans. A recent study shows that the incomes of the top 1 percent grew by 11.2 percent between 2009 and 2011 while the incomes of the remaining 99 percent fell by 0.4 percent.
Kentucky’s weaker income tax performance may reflect that the state has comparatively few higher-income people. In 2011, Kentucky ranked 43rd among the states in income from capital gains as a share of total income.[1. Center on Budget and Policy Priorities analysis of IRS data showing realized capital gains as a share of adjusted gross income by state.] Also, the state’s drop in sales tax receipts could result from a reluctance of low- and middle-income Kentuckians to purchase the goods that make up a big portion of sales tax receipts, such as appliances, furniture and clothing. Still-high unemployment and stagnant or declining wages are holding back consumers’ willingness to spend.
Revenue trends underline the critical importance of the personal income tax to an adequate state budget. As McNichol says, “states that rely more on income taxes (especially progressive income taxes, which set higher rates for higher incomes) than on sales taxes are seeing a more rapid revenue recovery.” If Kentucky had more of a consumption-based tax system with greater reliance on the sales tax, which some argue for, we’d be facing more painful budget cuts.
If revenues exceed the year’s forecast it would be good news, but it’s no time to celebrate. General Fund tax revenues are still below 2007 levels in inflation-adjusted dollars, while the demands on available money are heavy because the weak economy means many people are still eligible for low-income programs.
What’s more, McNichol says that the boost in personal income taxes this year may be inflated by some wealthy individuals shifting income into tax year 2012 they would have otherwise received in 2013 to avoid higher federal income taxes rates from expiration of the Bush tax cuts. That means more revenue for states this fiscal year, but less revenue next year.
