Financing Kentucky's future

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By The Staff

Most Kentucky businesses take a great interest in the financial stability of state government, the quality of services state government provides, the education product that comes out of our schools and institutions of higher learning, safe and up-to-date transportation infrastructure, and the general quality of life in the state.

We have all heard the dire predictions from the state budget office and the consensus forecasting group. We are currently operating with a state general fund budget that is 12 percent less than the previous year in many areas of state government. Universities were cut by 6 percent. There was a structural imbalance in both years of nearly $500 million. This means the state will spend more than it takes in.

Our transportation budget is woefully underfunded with the state's six-year plan showing $1.4 billion in projects and not enough revenue to start any new state projects. We can't begin to think about major rehabs to many of our interstates or construction of the mega projects like the Ohio River Bridges, the Brent Spence Bridge and the Henderson Bridge without major new sources of road income.

And when you add in the actuarially required contribution that will be required to keep state and local public employees' and teachers' pension funds solvent and the fact that Kentucky has raided all available funds over the past several years, you have a crisis on your hands.

Increasing the cigarette tax is the chosen target for the moment; but it is a red herring: no matter what your opinion is of taxing tobacco, it does not meet its intended purpose. It will not begin to provide enough income to solve our financial problems and it would be tragic to leave the perception that it would.

Legislative leaders and the Governor have expressed their feeling that the cigarette tax increase would only be a patch to the current year budget and not address even the second year of the biennium, let alone 2010. That compounds the political problems because it forces the legislature to consider raising taxes the NEXT time they return, which must be simultaneously frustrating and infuriating, because legislators will not likely tolerate voting on tax increases on an annual basis.

Kentucky has dug itself into a financial hole over the last several years and the time has come to consider serious alternatives: more major cut in services, a major boost in new revenue to the general fund and the road fund or most likely, some combination of both.

Would Kentuckians be willing to raise the sales tax a penny, in the face of major cuts of government services? It would generate $500 million annually in new revenue.

Some will want to look at the current exemptions and whether we could actually reduce the tax by repealing some. But the fact is that we would never repeal the exemption for food and prescription drugs and they make up the lion's share of exemptions anyway. We always discuss the services exemption from the sales tax and have never been able to pass it. All of the exemptions are there for a reason - some interest group wants the exemption and will fight to keep it there.

The gas tax could also be raised effectively and almost imperceptively either through accelerating the current index calculation, which could be done now with no effective increase at the moment or go ahead and bump it five cents while the prices are low. The money could be dedicated to rehabbing our existing infrastructure.

The Governor and General Assembly need to review current sales tax exemptions and consider the sales tax for some services. Yet another option to that is to raise the base up now even if it means sun-setting the increase in a few years after we have studied its effects to see if we have stabilized the budgetary problems.

And where, for Pete's sake, has the topic of tax reform gone? Truth is, only when we address taxation comprehensively and sensibly will be able to depart from the patchwork quilt of taxation that impedes our competitive stance in the national and global markets.

What we cannot afford to do is wait any longer. We need the combined leadership of the Senate, the House and the Governor, working cooperatively to find a solution that improves government, improves its financial footing and makes Kentucky more competitive. The 2009 and 2010 sessions of the General Assembly will tell whether we were brave enough to take our state to the next level, or whether we were satisfied to continue to wallow in the mess we're in today.

- Mike Helton is the managing partner of Government Strategies LLC, a government relations and lobbying form in Frankfort. He represents many transportation interests including the Kentucky Association of Highway Contractors, the Build the Bridges Coalition and TARC.