Governor Asks for Tax Reform

By John Gregory | 2/10/17 4:53 PM

Gov. Matt Bevin 2017 SOTC Address Transcript 02.08.17 (.pdf document)

In his second State of the Commonwealth message to Kentucky lawmakers, Gov. Matt Bevin warned that tax reform cannot be revenue neutral given the public pension debts and other obligations facing the state.

The governor spoke to a joint session of the Kentucky Senate and House of Representatives for nearly an hour Wednesday night about the accomplishments of his first year in office, and the challenges he says politicians must address in the coming months.

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Pension Debts and Tax Reform
Gov. Bevin said he believes the unfunded liabilities in the state retirement systems to be $82 billion, which he said he bases on returns for 30-year Treasury notes. That’s nearly $50 billion more than recent estimates of the debts in the state employee and teacher pension plans. He said the Kentucky Employees Retirement System is so badly underfunded (at only 10 cents for every dollar owed) that it’s not a pension plan, but a checking account about to go bankrupt.

To address the pension debts and other state obligations, Bevin said a special legislative session on tax reform will be convened later this year. He said work is already underway behind the scenes on an overhaul proposal that he said would not be revenue neutral.

“We cannot afford for it to be. That’s a straight up fact,” said Bevin. “This is a state that needs to move ultimately from a production based tax economy to a consumption based tax economy.”

While he pledged to repeal the state’s inventory and inheritance taxes, Bevin warned that many popular tax exemptions may be eliminated. He said the state loses more money from tax loopholes than it collects in tax revenues.

“I’m not talking nickel ante things,” Bevin said. “I’m talking about bringing every single sacred cow that people think can’t be touched on the tax front, bringing them all out of the barn, and some of those sacred cows are going to be returned to the barn and some of them are going to be turned into hamburger.”

He said a new tax system must lower the overall tax burden while broadening the tax base. It must also be fairer and easier for the public to understand, the governor said.

Other Challenges
Bevin praised investments in workforce development efforts, but said the state still has 225,000 able-bodied, working-age adults who don’t have or are not looking for jobs. He said that gives Kentucky the 47th lowest workforce participation rate in the country. That’s caused in part, the governor said, because the state makes it too easy for people to live on welfare.

“You can make twice as much not working in this state as you can in Tennessee,” Bevin said. “We can’t make it so easy to not work.”

On public education the governor said charter schools will come to the commonwealth and he pledged to abolish the Common Core educational standards.

His administration will also continue to push outcomes-based funding (also called performance-based funding) for the state’s public universities and colleges. Bevin said he wants Kentucky to become the “hub of excellence in America for engineering and manufacturing,” but he said that will require higher education to focus more on preparing graduates for the jobs available in the current economy.

“We need to use the money you all are responsible for on behalf of our taxpayers to invest in education where we can get a good return on it,” Bevin said. “Interpretive this and interdisciplinary that, this is not where the jobs of the 21st century are.”

The governor announced plans to create a czar to oversee foster care and adoptions for the state. He said Kentucky has 8,000 children in foster care, which he contends is far too many. Bevin said he wants the commonwealth to become a national leader in how safely, quickly, and efficiently it handles the adoption process.

The Bevin administration’s proposed overhaul of Medicaid will also become a national model, according to the governor. He said Medicaid coverage should be reserved for the medically frail, pregnant women, children, and the most disadvantaged.

“If we indeed offer it to those who don’t need it, allow people to take advantage of the system and to misuse the system, it comes at the very expense of those who truly need it,” Bevin said. “And it comes at a price that, frankly, cannot be afforded.”

Accomplishments, the Media, and a New Book
The governor opened his address by reading from a collection of emails his office had received from Kentuckians. He noted comments and suggestions from a volunteer firefighter, a high school science teacher, a custodian, and a state government employee. He became visibly emotional when reading an email from the mother of a veteran who had committed suicide.

Bevin then touted a number of accomplishments for his first year in office: increased moneys to fight the heroin and prescription opioid crisis; funding for dual-credit classes for high school students; state park maintenance; and pay raises for social workers and state police officers. He also praised legislative actions to make Kentucky a right-to-work state, repeal prevailing wage laws, limit abortions, allow felony expungement, and address the backlog of untested rape kits.

The governor also encouraged Kentuckians to follow his social media accounts instead of following traditional media, which he said is dying.

“It’s breathlessly discovering things and talking about things that are irrelevant, while ignoring things like murder rates, ignoring things like failing schools,” Bevin said. “I would challenge those who would purport to be media to focus on things that matter, to elevate Kentucky, to focus on…how we can become the best version of ourselves.”

Finally, as he did last year, the governor recommended a book for lawmakers and citizens to read. This year’s selection was “Hillbilly Elegy” by J.D. Vance.

Legislators Respond
Kentucky House Speaker Jeff Hoover (R-Jamestown) and Senate President Robert Stivers (R-Manchester) offered a “wait and see” approach to the governor’s plan to generate more revenues from tax reform.

“We have monumental challenges facing this state,” Hoover said. “But at the same time we want to be fiscally responsible. … Every governor wants more money. There’s no question about that. We’ll just have to see what the proposal is and where we can go with it.”

Stivers said he hopes the governor’s plan increases revenue through pro-business measures that create a stronger economy, rather than through more taxes.

“Will it be revenue neutral?” Stivers asked. “Maybe, maybe not, but it depends on how you define that when you grow revenues because you grow jobs.”

The leaders said they won’t rush consideration of Senate Bill 1. Stivers said lawmakers need more time to fully understand all the changes to public education curricula development, testing, and accountability proposed in the bill. Hoover said they’re also taking a slower approach to charter school legislation to ensure that all questions about constitutionality are resolved.

There had been some discussion of trying to shorten the current session in order to save money for a special session on tax and pension reform later this year. Hoover and Stivers say they now expect to go the full 30 days of this session so they have time to complete work on all the legislation they hope to pass.

House Minority Floor Leader Rocky Adkins (D-Sandy Hook) pledged to work with the governor and the Republican majorities on issues where they can find agreement. Otherwise he said Frankfort Democrats will serve as the loyal opposition that holds the majority accountable.

Adkins reserved comment on the governor’s tax reform statements, saying he wants to see specific proposals from the administration first. The Democrat did say more should be done to promote Kentucky’s burgeoning aerospace industry, which now leads the state in exports. And Adkins said he expects vigorous debate over charter schools.

“We don’t have enough money to fund public education today, and you siphon off money for charter schools, I worry about that,” Adkins says. “And I worry about the evidence I’m seeing from other states about how [charters are] working.”

Democratic leaders will announce their agenda for the remainder of the session on Thursday. Adkins said it will focus on jobs and the economy, health issues and the drug epidemic, lifting up the middle class, and infrastructure improvements.