State Budget Shortfall: Likely Causes and Possible Cures

by John Gregory | 07/08/14 3:21 PM

As lawmakers await the final tally on the state budget shortfall for fiscal year 2014, some in Frankfort are already blaming anemic state revenues on several familiar issues.

Appearing on Monday's edition of Kentucky Tonight, House Appropriations and Revenue Committee Chairman Rick Rand (D-Bedford) and Senate Appropriations and Revenue Committee Vice-Chairman David Givens (R-Greensburg) point to lower than expected personal income taxes receipts. Givens says state economists projected those revenues to grow by about 2 percent this year. Instead, they only grew about half a percent.

The panel on yesterday's program attributes that sluggishness to lingering effects of the recession. Bryan Sunderland of the Kentucky Chamber of Commerce says the state lost about 104,000 jobs during the downturn, and has only recovered around 65,000 jobs. About half of those are low-wage, part-time, temporary or contract positions. He contends companies aren't confident enough in the recovery to invest in hiring full-time workers and paying their benefits.

With about 40 percent of state revenues coming from individual income taxes, any change in those receipts can have a substantial impact on the state budget. Jason Bailey, director of the Kentucky Center for Economic Policy, says personal tax revenues grew 6 percent last year, so he hopes this year's dip is a temporary aberration. Bailey argues the commonwealth is also hurt by having relatively few higher paying jobs.

"We've seen a recovery where incomes have grown very rapidly at the top, but the average working person, their wages and income are not growing," Bailey explains. "So Kentucky is disproportionately harmed by that."

Factors Contributing to Slow Job Growth
Sen. Givens contends that businesses face a number of challenges to creating more and better-paying jobs. One factor, he says, is that the state doesn't foster entrepreneurism.

"We don't cultivate a great, vast number of folks who want to start businesses over and over and take risks," says Givens. "It's not part of the culture, especially in our rural part of the state."

Givens and Sunderland also argue that not being a right-to-work state restricts business development in Kentucky. More than 20 states, including neighboring Indiana, Tennessee, and Virginia, have right-to-work rules, which allow an employee to decide whether they want to join or financially support a union in their workplace.

"It is a huge factor when relocating or locating a business to a state," Sunderland says. "We are marked off of numerous lists because of it."

While Sunderland claims wages are higher in right-to-work states, Rep. Rand says he opposes the law because it ultimately hurts those in blue-collar jobs.

"I'm not for lowering the standard for working people, and that's what we're talking about," Rand responds. "We're talking about people working by the sweat of their brow, and saying we're going to pay you less. That is going in the wrong direction."

Another area of concern is the Affordable Care Act and the expansion of Medicaid. Sunderland and Givens contend as more people enroll in those programs, the costs of those benefits will far exceed projections. That will absorb government dollars that could have gone to job creation, education, and infrastructure projects.

Givens says business owners also feel uncertain about the future of the state health insurance exchange, Kynect. He says since Gov. Beshear unilaterally created the program, a future governor could unilaterally decide to end it.

Health Care Jobs and Certificate of Need
Rand says it wouldn't make sense for another governor to repeal Kynect because that would leave thousands of Kentuckians without health insurance. Plus, he argues the 2014-2016 state budget was predicated on nearly $200 million in savings the program is expected to generate from lower medical costs.

Jason Bailey goes a step further to say that the Affordable Care Act will create jobs because more people with insurance will need more health care services.

Givens asserts that increased demand may force the state to revisit its existing “certificate of need” rules to grant additional permits for new medical facilities. Sen. Rand responds that the state already has enough hospitals and health services in urban communities. The greater need is for doctors, nurse practitioners, and primary care providers in rural areas.

Tax Reform Still an Option
The Kentucky Tonight panel agreed that another crucial way to stabilize state revenues is to overhaul and update the tax system. Bailey says Kentucky can't simply cut taxes to attract business. He calls for reform that's fair to all taxpayers — not just corporations and the wealthy — and that creates sufficient revenue to fund education, social services, and infrastructure needs.

Sunderland counters by saying a new tax system must not harm the state’s competitiveness. He sees bipartisan support for reform that focuses on fostering economic growth, reducing the cost of capital for businesses, and simplifying the tax codes. Given the relative strength of recent sales tax receipts, Sunderland also suggests scaling back on income taxes in favor of a consumption tax.

Earlier this year the governor's blue ribbon tax commission issued a series of recommendations for updating the tax system, but the General Assembly took no action on the proposal. Sen. Givens says he's hopeful reform will be debated in next year's session and as part of the 2015 governor's race.

Short-term Shortfall Solutions
Despite a wealth of ideas for generating more revenue in the future, the issue of the current shortfall still remains. House Budget Chairman Rand says legislators will help the governor as best they can to bring the budget back in balance. Senate Vice-Chair Givens says the state will know the actual amount of the shortfall in a few days, which he expects to be between $50 and $90 million.

Rand and Givens say the governor may tap part of the state's $90 million Rainy Day Fund, cut into the $80 million starting balance legislators wrote into the 2015 budget, and ask state agencies to further limit spending. They say the trick will be to address the 2014 shortfall without simply pushing the deficit down the road and compounding the problem for subsequent budget years.

State officials have until the end of July to close the 2014 books.

Watch the full Kentucky Tonight program.