Remember when Republican lawmakers — spurred on by the Chamber of Commerce — put Kentucky on the sober, responsible path to ending the state income tax?
We were assured this route would protect Kentucky from becoming another Kansas. Republican Gov. Sam Brownback’s “pro-growth” tax cuts had put the Sunflower State into an economic tailspin. Things got so desperate the Republican legislature repealed the tax overhaul and Kansas became a cautionary tale.
But not to fear. Kentucky would avoid becoming another Kansas by gradually reducing the income tax and, very importantly, only when education and other state services could sustain the cuts, as measured by two metrics laid out in state law two years ago.
That 2022 law also reduced the income tax from 5% to 4.5%, partially offset by an expansion of the sales tax. And it dictated that, before the legislature could slice the income tax rate by another half percentage point, state finances in the prior fiscal year must clear two hurdles involving (1) the size of the Budget Reserve Trust Fund ( “rainy day” fund) in comparison to General Fund revenue and (2) tax revenue in comparison to the cost of a full percentage point lowering of the income tax rate.
Both hurdles were surpassed in fiscal 2022 as the “rainy day” fund reached a record $2.7 billion, allowing the legislature to again lower the income tax rate, taking it to 4%, effective January 2024.
The surplus has kept growing, plumping up the “rainy day” fund to a record $3.7 billion. Nonetheless, last fiscal year, the state failed to clear one of the two hurdles, tripping up plans for another income tax cut in this legislative session.
What to do when you can’t clear a hurdle? Well, if you’re the Kentucky House you sneak around it.
The spending plans approved by the House last month employ at least three questionable means for circumventing the fiscal requirements that Republican lawmakers put in place to protect us from becoming another Kansas.
Suspending their own law
For starters, the House voted to suspend its own sober, responsible law in order to approve $1.7 billion in one-time spending outside the budget altogether.
House Bill 1 begins: “Notwithstanding KRS 141.020(2)(a)2., the appropriations contained in this Act are supported solely by funds from the Budget Reserve Trust Fund Account established by KRS 48.705 and shall not be identified as GF appropriations when certifying the reduction conditions pursuant to KRS 141.020(2)(a)5. and (d)2. to 5.”
Translation: Because our responsible path isn’t taking us where we (and the Chamber) want fast enough, we’re exercising our prerogative to ignore our own law and hereby decreeing that $1.7 billion in spending doesn’t count.
Using debt when we’ve actually got the money
Second, the House budget curiously includes a lot of borrowing, the second-most ever. Curious because the state is sitting on a mountain of cash and interest rates are high. Prudence — both the kitchen-table and classic-Republican varieties — would say spend the cash, avoid the high interest rates. However, the debt has one big advantage if you’re looking to game your own law by painting a rosy picture: The legislature has to budget only for annual payments on the borrowing rather than for the full cost of the projects.
For comparison purposes, the House budget contains $2.7 billion in General Fund bonding while Gov. Andy Beshear recommends $1.8 billion. Beshear recommends using $433 million in cash to pay for capital projects. The House budget would use only $9 million in cash for capital projects.
Now there are some (most prominently Republican lawmakers and the Chamber) who argue that the key to future prosperity is eliminating the income tax. Instead of Kansas, we’d be Tennessee, which, in the eyes of Kentucky Republicans, is economic heaven.
I could argue against making our tax system even more regressive, but will save that for another day because I understand that if you believe that continuing to cut the income tax would be the best thing ever for Kentucky, you’d stomach the above-described budgetary sleights-of-hand, even the borrowing, to eventually achieve zero income tax. Sure, it’s hypocritical and disingenuous of Republicans to not be more upfront about ignoring their own law. They could change the law rather than “notwithstanding it” but, hey, it’s the Kentucky legislature where hypocrisy and disingenuousness are on brand.
Underfunding Medicaid by hundreds of millions
However, a third way the budget games the “we’re not going to be Kansas” law is inexcusable no matter how much you want to cut the income tax. The House knowingly underfunds Medicaid by almost a billion dollars in the first year of the two-year budget. If approved by the Senate, the underfunding will force a reduction in payments to providers, services to patients or both.
While the House budget cuts Medicaid on one hand, it also mandates expansions of much-needed Medicaid services on the other hand, making the underfunding even more difficult to manage. The House fully funds Medicaid in the budget’s second year when it’s already known that there will be no way to meet the fiscal triggers.
Another major difference between the House and Beshear budgets is General Fund spending for education. Beshear recommends $1.1 billion more than the House in the first year of the budget and $673 million more the second year.
Chris McDaniel, chairman of the Senate Appropriations and Revenue Committee, strikes me as a genuinely responsible lawmaker. It will be interesting to see if he goes along with the House plan for evading the legislature’s own safeguards for keeping us from becoming another Kansas.
Or, if we will just be Kansas in slow motion.
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Written by Jamie Lucke. Cross-posted from the Kentucky Lantern.
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