BY CALEB O. BROWN (for Louisville Eccentric Observer)
Gov. Ernie Fletcher’s tax plan is reborn, with changes here and there. A few of the tweaks have encouraged his ideological boosters, but some have left the same allies scratching their noggins.
Flashback to last March: The first Fletcher tax plan was unveiled just as legislators were in the final weeks of canoodling with the state budget. The “revenue-neutral” plan included cuts in corporate and personal income taxes, a 26-cent hike in the cigarette tax and various other tax cuts, hikes and shifts aimed at improving Kentucky’s standing in the region as a place to conduct business.
The General Assembly’s efforts went nowhere; one year later state government still lacks a formal spending plan. In that period, the governor’s rhetoric and tax plan have shifted, if only slightly.
“Revenue neutral is a term that we’ve used,” Fletcher said of his tax plan late last year. “I think tax neutral is probably a better term in the sense that we don’t want to increase taxes on working Kentuckians.”
Grover Norquist is president of the Americans for Tax Reform. During a visit to Fletcher last month to talk up tax reform efforts, he said, “I’m not sure I’m aware of the distinction.”
In 1986, ATR created an unqualified “Taxpayer Protection Pledge” that Norquist and Co. cajoled some federal and state legislators into signing. It’s a formal pledge to oppose all manner of tax increases. (In Kentucky, Fletcher, 17 of 38 senators, and 31 of 100 House members have signed the pledge.) Since Norquist’s January visit, a few Kentucky legislators, including state Rep. Steve Nunn, R-Glasgow, have divorced themselves from the pledge, saying they didn’t realize the promise to oppose tax hikes wouldn’t just wither away on its own. Norquist said Fletcher’s tax plan — its first version, anyway — passed muster.
Version 2.0
The second coming of the Fletcher tax plan has a few changes dictated by necessity. Hundreds of millions of dollars in new windfall revenues that are filling state coffers, the governor says, are already spoken for by Medicaid, state worker health insurance and state prisons.
But Fletcher’s changes have left would-be boosters underwhelmed.
Aside from a much larger cigarette tax hike, the plan also diverts millions of dollars in taxes on horse stud fees into a subsidy program for horse breeders. That portion of the plan was included at the behest of state Sen. Damon Thayer, R-Georgetown, a horse industry executive. Thayer says stud fees generate $15 million a year for Kentucky’s general fund.
Thayer, while promoting Kentucky’s “best stallions in the world,” admits that Kentucky is the only major horse breeding state that taxes stud fees, an admission that perplexes Aaron Morris, a fiscal policy analyst at the Bluegrass Institute for Public Policy Solutions, a public policy watchdog group in Bowling Green.
“The best thing to do is just get rid of the tax on stud fees that we have right now,” Morris said. “What they’re trying to do is take with one hand and give back with the other. That entails a lot of bureaucracy. The question is, who are they going to take it from and who are going to be the net recipients from this?”
Bluegrass Institute President Chris Derry has resigned himself to the fact that smokers are going to fund much of the governor’s new spending preferences.
“They’ve gotten together and decided smokers are the ones that will be paying for all of this,” he said.
Derry and Morris long to see Fletcher borrow rhetoric from California Gov. Arnold Schwarzenegger, namely the whole bit about, “[Insert state here] doesn’t have a revenue problem, it has a spending problem.” Both are happy to see Fletcher tackling tax reform, but they don’t think the state’s situation will improve significantly, even if Fletcher’s plan is followed to the letter.
Speaking to a tax forum audience in January at the University of Louisville, Lt. Gov. Steve Pence brought up the role of taxes in making the state competitive in attracting new businesses. “When you’re talking to businessmen about bringing a business here, you have to have a tax structure that is friendly to them,” Pence said.
“We are 44th in the nation in terms of being tax-friendly to businesses,” he added, citing Kentucky’s rank by the nonpartisan Tax Foundation, a Washington, D.C.-based non-profit educational organization founded in 1937. What Pence did not say in his speech was that a Tax Foundation economist found Fletcher’s first stab at tax reform would only move Kentucky up three spots, to No. 41.
In an interview, Pence said, “Moving a few notches would be an improvement,” but added that he thinks Kentucky’s tax code will prove more attractive to businesses than the foundation would make it appear.
Fletcher, in an interview, said, “I don’t think that we’re going to be behind the other states at all.” He said the foundation analysis focused on Kentucky’s higher individual tax rates and that his plan has triggers that would lower individual tax rates as state revenues grow. The newer Fletcher plan has a steeper cut in personal income taxes. The Tax Foundation has not analyzed the new plan.
Reform on a shoestring
The governor has become enamored with a December 2004 report titled “Kentucky’s Economic Competitiveness: A Call for Modernization of the State’s Fiscal Policies,” issued by University of Louisville economist Paul Coomes, in which he discusses the factors hindering the state economically. But if Fletcher and Coomes agree that Kentucky’s economy is not competitive, they don’t agree on why.
The report was written for the chambers of commerce of Northern Kentucky, Lexington and Louisville. It found that urban centers (Louisville chief among them) are the economic engines of Kentucky, and it said Kentucky’s tax system and spending priorities force urban centers to be net donors of tax dollars. For example, for every dollar Louisville taxpayers send to Frankfort, only about half comes back in the form of state services.
“[Coomes] wasn’t just talking about rural versus urban, he was also talking about where Kentucky falls behind other states when it comes to the types of jobs we’ve created,” Fletcher told Rotarians last month. “He also pointed out that we haven’t been able to progress in professional services and that our percentage of professional services jobs is much lower than the national average.”
Economists dream of having the ear of a politician. Fletcher’s clear articulation of some of Kentucky’s economic problems is encouraging to state economic development experts, but Coomes’ ideas to address the very problem to which Fletcher referred seem less palatable to the governor.
The report provides several recommendations for ramping up the state’s economy, but one idea Coomes has floated has raised some eyebrows. He thinks a simple way to kickstart it would be by helping Kentucky’s urban centers while attracting “new economy” jobs.
“We could move a lot of the state workers to downtown Louisville,” he said. “There’s no reason that all the several thousand of the state professional workers need to be a few miles from the governor’s mansion.”
According to the report, moving the jobs to Louisville would strengthen the metropolitan area’s ability to attract some of the needed ingredients for a productive economy, including conventions and information-age jobs, and help boost revenues to better fuel the economic engines of the state.
To whit, Coomes asserts, Nashville and Indianapolis, to name two of Louisville’s chief regional competitors, have an advantage because they’re state capitals and therefore reap the ample state bureaucracy and professional service jobs.
Fletcher isn’t about to touch such a radical idea.
“When you look at the political feasibility of that, it’s just not there,” he said in the interview.
Coomes has heard this line before. This is, after all, the third time he has shared some of these findings. (The recent report updated and extended one study published in 1994 and another released in 1999.) While politicians still don’t see these ideas as politically feasible, over the past 10 years, they have gained currency among legislators. This time politicians are listening even more and discussing the merits of the study. Maybe a fourth study will convince Kentucky’s political leadership to trust Coomes’ advice — and not just borrow his rhetoric — to resolve Kentucky’s economic problems.
