Tax Expenditures Big Cause of Budget Problems, but Some Legislators Want More
February 24, 2012
There are three main reasons that the budget the legislature is now considering includes so many cuts. First, the economy is still struggling. Second, federal recovery-related financial assistance to the states is gone. And third, Kentucky’s tax system needs to be reformed. One reason for the third problem is that the General Assembly typically puts in place new “tax expenditures” every time it meets.
Tax expenditures are special tax preferences, rates or exemptions that benefit particular groups, industries or activities. Just like spending on the budget, they are a way the state allocates dollars. Kentucky has well over 200 tax expenditures, and collectively they are a huge and growing drain on revenue.
After a tax expenditure is enacted, the General Assembly typically never goes back to assess whether it achieves its intended benefit, and if that benefit is worth the lost revenue.
As before, the 2012 regular session includes a slew of new tax expenditure proposals, including the following:
- HB 10: Provides an income tax credit to those contracting for services with legally blind or severely disabled individuals.
- HB 22: Provides a tax credit to employers providing paid leave to those donating organs or bone marrow.
- HB 24: Lowers and provides exemptions to personal property taxes and sales taxes for veterans’ organizations.
- HB 66: Creates an income tax credit for those who make contributions to scholarships for students at private K-12 schools.
- HB 96 and HB 101: Imposes a sales tax holiday.
- HB 97: Excludes the delivery charges for direct mail from the sales tax.
- HB 113: Creates a tax credit for “angel investors,” who are individuals that invest in early-stage businesses.
- HB 136: Exempts bees and beekeeping supplies and equipment from the sales tax.
- HB 150: Allows a tax deduction for health care providers for the costs of providing charitable care services (health care to uninsured persons who do not pay).
- HB 162: Makes it voluntary for corporations to file consolidated tax returns (consolidation is a strategy to decrease tax avoidance).
- HB 192: Provides a tax credit for costs associated with installing insulation in houses that are near airports.
- HB 193: Provides an income tax credit of $1,000 for each volunteer firefighter.
- HB 205 and HB 285: Exempts purchase of equipment and supplies for the horse industry from the sales tax.
- HB 211: Allows the homestead exemption for service-connected totally disabled veterans to be transferred to the surviving spouse upon the death of the veteran.
- HB 212: Provides a sales tax refund of up to $3,000 for new small businesses.
- HB 245: Provides income tax credits for those who convert vehicles to burn natural gas or who buy new vehicles that do so.
- HB 246: Provides tax incentives for large alternative energy and renewable energy manufacturing facilities, and exempts equipment used in drilling geothermal wells from the sales tax.
- HB 288: Exempts drugs used in treating farm animals from the sales tax.
- HB 312: Provides a credit against income taxes for property taxes paid by distillers for distilled spirits aging in barrels if the funds are used for capital improvement projects.
- HB 393: Exempts governmental non-profit self-insurance groups that provide insurance coverage for government employees from the insurance premium tax.
- HB 397: Exempts manufactured homes from the sales tax.
- HB 400: Expands a program that provided tax breaks to Ford Motor Company for reinvestment to make Toyota, GM and large auto parts suppliers eligible.
- HB 405: Expands the number of employees for which tax credits are provided for tuition at UPS-affiliated Metropolitan College in Louisville, and removes the sunset date for the tax credit.
It is easy to find people who would support and defend any one of these proposals. And many of these bills may, in fact, be good ideas.
But the reality is that all of them cost the state money, and some of the costs are substantial. The current budget discussion in Frankfort underlines the reality that tough choices must be made about the allocation of public dollars. A tax expenditure, just like any other use of public monies, must be measured against whether it is the highest and best use of those dollars, or whether the monies would best be spent elsewhere.
Tax expenditures are an increasingly popular way to spend public dollars because there are structural biases that favor them over spending on the budget. Tax expenditures come off the top, before monies are spent on anything else. Tax expenditures exist in perpetuity, while programs funded through the budget must receive new appropriations every two years—and in recent years have been severely cut. Also, politicians proposing tax expenditures can claim to be cutting taxes while at the same time increasing spending for a particular purpose.
Since the state loses a huge amount of revenue from tax expenditures, we need structural changes that allow us to more closely assess this spending.
One way to better address the problem would be to establish a statutory legislative committee whose responsibility is to review all state tax expenditures regularly on a rotating basis. The General Assembly already has committees that conduct program review, administrative regulation review, and oversight of capital projects and bond issues. Given that we spend roughly as much through tax expenditures as we do through the budget, it makes sense to put better systems in place to determine whether we’re getting our money’s worth.
Committee staff could analyze the effectiveness of each tax expenditure in relation to its purpose, describe who benefits, and identify the cost. A “Tax Expenditure Review Committee” could then make recommendations about whether to limit, expand, sunset, or revamp each measure, and their recommendations could feed into the biennial budget process.
Tax expenditures have become a major way that state government in Kentucky, as elsewhere, allocates resources. It only makes sense that mechanisms be put in place to evaluate what we are getting as a result.
For more on tax expenditure reform in Kentucky, see this policy brief.