Revenue Options Provide Solution to Kentucky’s Pension Funding Problems

By Kenny Colston
October 31, 2017

As the governor, legislative leaders and stakeholders wrestle with potential harmful changes to pension benefits of Kentucky public employees, a new report from the Kentucky Center for Economic Policy (KCEP) is a reminder there is another way to pay down our liabilities and move the state forward.

The report, Revenue Options To Meet Obligations and Protect Investments, lists dozens of options for funding pensions as well as other critical services that have been cut repeatedly due to revenue shortfalls over the past decade. The report also describes how growing special interest tax breaks have eroded Kentucky’s revenue base since the last major effort to generate new revenue in 1990.

“The idea that the only way to fund the pension systems is by cutting benefits yet again is a false choice,” Jason Bailey, executive director of KCEP and one of the report’s three authors, said. “We could also clean up some of the billions of dollars’ worth in tax breaks that drain revenue from our budget. It’s a way to move the state forward on pensions, education and other critical investments needed to build thriving communities.”

Options in the report would improve the fairness of Kentucky’s tax system while generating revenue. Cleaning up a comprehensive set of tax breaks in the individual and corporate income taxes, sales tax and others could generate at least a billion dollars to improve Kentucky’s fiscal health. Options include:

  • Follow surrounding states (Ohio, Indiana, Illinois and West Virginia) and simplify filing by shifting from itemized deductions to the existing standard deduction for all — $367 million
  • Create new income tax rates of 6.5 percent at $100,000 and 7 percent at $250,000 and phase out lower rates for income from $250,000 to $300,000 — $130 million
  • Tighten corporate tax loopholes through combined reporting and a throwback rule — $66 million
  • Create a review process for all business tax break programs, require sunset dates and require the General Assembly to reauthorize programs — up to $361 million from sunsets
  • Expand the sales tax to include luxury services — $115 million

Without new revenue, in addition to harmful pension benefit cuts, the next two-year budget will likely include drastic cuts to essential services. If allowed to happen, these will come on top of 17 rounds of cuts since 2008 in education, infrastructure and more. Cleaning up Kentucky’s tax code will not only help solve pension underfunding, but stave off harmful cuts to critical investments and put us back on the path to strengthening Kentucky’s future.

“We are founded as a commonwealth, but for far too long, Kentucky has let special interests drain investments out of our communities through tax breaks,” Bailey said. “It’s time for us to come together again, clean up our tax code and re-invest in our state.