KY Policy Blog

Pension Revenue Bill Provides Modest Resources to Address Budget Challenges

By Jason Bailey
March 28, 2013

The pension revenue bill that passed the General Assembly this week provides only an estimated $31.7 million in net new state revenue to help address Kentucky’s budget needs. House Bill 440 combines General Fund revenue tweaks and a Road Fund tax cut.

While official documents identified $95.7 million in new General Fund monies, $30 million of what is counted in that amount is expected revenue from federal tax law changes and not because of House Bill 440. Also, the bill cuts $34 million from the Road Fund by providing a trade-in credit for the value of a used car when purchasing a new car. When those two items are subtracted from $95.7 million, the net impact of the bill is only $31.7 million.

According to the actuarial analysis of the pension bill, the state will need an estimated $253 million more in 2015 and $284 million in 2016 from all funds (meaning the General Fund but also the Road Fund and other sources) to make the full annual pension contribution.

$32.5 million of the added General Fund dollars in the bill come from a reduction in the individual income tax credit that can be claimed for each member of a household from $20 to $10. Another $33.2 million is from closing various loopholes, including $15 million from no longer allowing large multi-state corporations to use management fees paid between subsidiaries to lower or reduce their state corporate income taxes and $11.2 million from limiting the compensation vendors can claim from remitting sales taxes to the state.

People below the poverty line in Kentucky don’t pay state income states, so would not be impacted by the cut in the personal income tax credit. For those above the poverty line, the plan is slightly regressive although the additional taxes owed are very small. For a three-person family, the resulting $30 in additional taxes would make up 0.09 percent of income for families who make $35,000 a year and 0.02 percent of income for those making $150,000 a year.

The bill’s cut in the Road Fund is on top of the long-term structural challenges Kentucky faces in sustaining its transportation revenues, over half of which comes from the tax on motor fuels, primarily the gas tax. Reliance on the gas tax is problematic for the Road Fund, as automobile fuel efficiency is increasing in part because of higher standards required under federal law. In Kentucky, taxable gallons of gas have declined just over one percent a year on average for the past seven years. Gas tax revenues will be eroded further by the move to cars with electric or other fuel sources.

The trend in declining usage has been masked in Kentucky in recent years because most of the state’s gas tax is pegged to the wholesale price of gasoline, which has been rising.

Because the gas tax is linked to the price, it is also vulnerable to price decreases. The state sets a floor below which the average wholesale price cannot go, but the last increase in the floor was in 2009 to the then-price of $1.786 a gallon. The Governor’s Blue Ribbon Commission on Tax Reform proposed raising the floor to the current average wholesale price, which is about $2.616 a gallon, to better protect the Road Fund against price declines. But HB 440 takes no action on that recommendation.

Overall, the revenue plan is small and nowhere close to the kind of comprehensive tax reform proposal that the Blue Ribbon Tax Commission spent 11 months developing. Although not perfect, that plan would raise $659 million. The next question on everyone’s lips should be: when will Kentucky address the broader and bigger issue of funding a more adequate budget and fixing our tax system for the long haul?

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