Op-Ed: Focus on Spending Cuts Ignores Revenue Problem

By Jason Bailey
August 22, 2011

Published in the Lexington Herald-Leader, August 22, 2011.

Kentucky is in great need of a substantive conversation about how to better fund essential services in its state budget.

But by ignoring the state’s revenue problems, the Kentucky Chamber of Commerce’s “Leaky Bucket” reports offer a one-dimensional and potentially harmful view of the state budget picture.

It is well-documented that Kentucky has problems with its tax system that prevent revenue from keeping up with the growing and changing economy. Simply put, our tax code is outdated and has too many holes.

Over time, the resulting gap between Kentucky’s needs and the resources we have to meet them keeps growing. If state General Fund revenue—Kentucky’s main pot of funding—was able to perform now as it did in the 1990s Kentucky would have over a billion more dollars a year to cope with the economic downturn and avoid deep cuts to services.

Without tax reform, the gap will continue to grow. The latest Consensus Forecasting Group estimate predicts an overall decline in revenue as a share of the Kentucky economy over the next four years.

Yet the Leaky Bucket reports overlook the state’s revenue issues to focus exclusively on cutting spending. The problem is that if the pie is getting continually smaller, efforts to divide it differently have diminishing effect. And while some ways to save money make good sense, others can harm Kentucky’s economy, health and quality of life.

The Chamber calls for reducing cost growth in Medicaid, public employee health benefits and the state’s prison system, and putting in place new budget mechanisms.

The first two of these challenges stem from broader and more fundamental problems with the American health care system that affect the private sector just as well as the public sector. All health care costs are growing too fast, and nationwide private insurance costs are growing at a faster rate than Medicaid once health differences are taken into account. While the Chamber points out that Kentucky’s Medicaid and public employee health care costs have grown rapidly over the past twelve years, in fact the cost of the state’s tax break for private health insurance has grown just as fast.

What is needed is additional system-wide health reform to put more emphasis on prevention of costly illnesses, coordination of care by doctors and other caregivers, reduction in administrative costs and more appropriate use of medical technologies.

In the meantime, we cannot simply blame Medicaid and public employees for the health system’s cost problems and make unreasonable cuts to benefits. Doing so runs the risk of further reducing Kentucky’s already poor health status. And in the case of public workers, we could hinder our ability to attract the qualified teachers, police officers and other public servants that we need.

On its third issue, the Chamber is right that we need to reduce prison costs by locking fewer people up for non-violent crimes and drug offenses. However, it’s important to note that potential budget savings from these efforts are limited because corrections make up only five percent of the budget, and a portion of the dollars saved must be reinvested in prevention efforts like drug treatment.

The Chamber’s recommendation that the state rebuild its rainy day fund is sound, as the fund did not have adequate resources going into the recession. The state should strive for reserves equal to 15 percent of annual spending rather than the five percent outlined in current statutes.

But the Chamber’s proposals for arbitrary limits on the state budget are without justification, and are dangerous. And the claim that Kentucky should prioritize education and economic development over all other areas ignores the range of investments that are important in a modern, complex economy and in a state with many needs. Investment in education is essential, but efforts that improve health and well-being, strengthen the state’s infrastructure, protect the environment and more are equally key to making Kentucky a great place to live and work.

Kentucky cannot just cut its way to greater prosperity and a higher quality of life. While smart spending decisions are a necessary part of good government, so is making sure the resources are there to pay for the investments we already have–and the ones we’ll need for the future.

Jason Bailey is director of the Kentucky Center for Economic Policy.