Bluegrass Beacon: More for taxpayers means more for government, too

By JIM WATERS
Bluegrass Institute for Public Policy Solutions

Tuesday, Aug. 22, 2023 — The recent announcement by the state Budget Director’s office that Kentucky brought in a record $15 billion in General Fund revenues during the previous fiscal year is good news for taxpayers, despite the grousing by advocates of bigger government and the spending hikes to fund it.

For taxpayers, the state’s record revenues – including $1.4 billion more than forecast for Fiscal 2023 – will likely trigger another cut in the individual income tax, from 4% to 3.5% in 2025. The General Assembly earlier this year reduced the rate from 4.5% to 4% for 2024 as a result of a stout surplus last year as well.

These cuts were put in motion by legislation in 2022 that immediately cut the individual income tax rate from 5% to 4.5% and established a process for phasing the tax out altogether in increments of half-percentage points as long as revenues and reserves remain strong.

It’s a responsible approach that includes a backstop requiring final legislative approval, allowing lawmakers to adjust in case of a precipitous downturn or devastating disaster between when the previous year’s revenue numbers are released in July and the next legislative session convenes in January.

Opponents of lowering the tax rate overstate the negative impact of the reduction on individual income tax receipts. They also discount the increase in other revenue streams and overall positive results of moving toward a tax policy that encourages the kind of economic growth we’re seeing in Kentucky and benchmark states.

Jason Bailey, executive director of the Kentucky Center for Economic Policy, bemoans the fact that income tax receipts have dropped as a result of the rate reduction.

“Well duh,” as my teenage daughter might say.

Why wouldn’t we expect that less revenue would be collected from individual income taxes if we lowered the rate?

But is the proper response by Frankfort, as Bailey suggests, to quit passing these modest cuts in the income tax rate and allow Kentuckians to keep more of their own money?

Absolutely not, especially in light of the fact that while revenues from income tax receipts may have dropped, proceeds from other streams significantly increased due to strong economic growth. Thus, there’s still plenty of money to fund government.

The $5.6 billion collected in sales-and-use taxes last fiscal year was on par with the $5.8 billion produced by individual income taxes. (Remaining revenues come from corporate income, property, coal severance and cigarette taxes.)

Bailey ignores this in his analysis, offering a straw-man argument about “some people who claim that lowering the rate will somehow spur new economic activities such that receipts won’t drop, and we’re not seeing that here.”

There’s never been an expectation that individual income tax receipts wouldn’t drop. Indeed, the fact they’re dropping while revenues raised from consumption taxes is rising offers confirmation that Kentucky’s on the right path to becoming competitive again. Other pro-growth states like Indiana to our north and our southern neighbor, Tennessee, have reduced or eliminated income taxes altogether and are experiencing unprecedented growth.

Bailey’s analysis of the revenue numbers and what they mean for the state come complete with griping about a lack of spending – nothing new to see here – and his claims, as reported by the Kentucky Lantern, that by continuing to cut the individual income tax rate, legislators risk “blow(ing) a hole in state funding for education and other services in the budget” in the likely event of a future economic recession.

How is more spending by government – the motif central to all of Bailey’s themes – going to help us guard against the impact of recessions?

Bailey is analyzing in denial.

Not only are we having record surpluses, but the legislature is spending at record levels, including significant increases in K-12 education. The huge budget surpluses have also made it possible for lawmakers to spend a half-billion dollars for relief in both the western and eastern parts of the commonwealth slammed by natural disasters without raising taxes or sweeping funds from other needed programs.

However, no matter how much Frankfort spends on education or flood relief or most anything else, it will never be enough for Bailey. His proclivities – and those of his tax-and-spend political twin, Gov. Andy Beshear – for more government and the spending hikes to fund it are never satisfied.

For example, Bailey doesn’t praise the legislature’s substantial funding increases for local school districts to cover pay increases for teachers and other needs. Apparently, it doesn’t fit his pre-contrived narrative, and therefore gets downplayed.

Bailey’s claims lose even more credibility with his unfounded and preposterous allegation that “in an attempt to meet the trigger conditions (required to reduce the income tax rate), the General Assembly has suppressed spending in the current budget.” Income tax cuts are triggered by revenues before decisions are made about how they will be spent.

The fact is, robust revenue growth has occurred since the income tax-rate cuts began. Even Beshear says Kentucky’s economy is “on fire.”

Coincidental? Doubtful.

While factors other than the income-tax reduction likely contribute to the growth of the state – like right-to-work and public pension reforms – the historically proven principle for growth is reconfirmed: Allow individuals to keep more of their hard-earned money and don’t punish them for more work and more productivity like income taxes do.

The result? Taxpayers will have more in their pockets and government will have more in its coffers.

Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free-market think tank. Read previous columns at www.bipps.org. Reach him at jwaters@freedomkentucky.com and @bipps on Twitter.

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