The Kentucky Center for Economic Policy has a good overview of what’s happened to Kentucky’s budget since 2008. The crucial thing to remember about state budgets is that they tend to cover things that almost everyone agrees are essential. The federal budget always covers enough different things that it’s easy to find a category you don’t like and think should be cut (the fact that most people don’t realize the categories they want to cut are a very small part of the budget anyway makes this particularly easy). State budgets also have to be balanced (a few accounting tricks aside) each year, which means during a tough economy, the very time when people most need state services, states are forced to cut back.
So, let’s begin with a look at the cuts Kentucky has made to its budget since 2008. You’ll notice the cuts range from 21 to 39 percent adjusted for inflation. (All the graphics in this post are from the KCEP report linked to above).
Gov. Beshear has tried to cut education less than other areas of the budget, but even in education there have already been some fairly drastic cuts. Let’s take a closer look education funding from preschool through high school (in millions of dollars):
This is important not only because of the cuts to funding, but also because it drives a wedge between rich districts that can afford to replace state funding with local revenue, and poor districts that can’t. In 1990 Kentucky reformed its school funding system after a judge ruled that the level of inequality in the previous funding system was unconstitutional. These cuts have served to re-expand the gap between rich schools and poor schools. The gap has now doubled from a low of $600 dollars in 1997 up to $1200 in 2010.
Now, overall, Kentucky’s general fund is currently largely spent on Education already, and in the wake of drastic cuts to other programs the upcoming budget cycle leaves us with no good choices for continued spending cuts (not that the choices were particularly good before).
Before we get to the Governor’s proposal for the 2014-2016 budget (KY’s fiscal year runs from July to June, so the current legislative session is debating a 2 year budget that would cover July 2014 to June 2016), it’s worth looking briefly at the revenue side of the budget. First, Kentucky’s overall tax code is currently regressive, with those in the 20-60th percentile of the income distribution paying the highest percentage of their income in taxes.
Part of the reason for this is that sales taxes, unlike income taxes, are naturally regressive. This is particularly true since Kentucky applies sales taxes to durable goods, but not to services, and the poor and middle class spend more of their income on goods. There is also a problem with tax loopholes, or tax expenditures. It costs Kentucky a large amount of money to not collect a tax on certain types of spending (mortgage interest, retirement accounts, charitable giving, etc.). Economically, this is no different than collecting the tax and then subsidizing housing or retirement, it is just often favored because it is less visible to the public and makes it seem like government is ‘smaller.’ Now, some of this spending may be good, although I would prefer to see it on the books as spending, but the main point here is that the amount of money spent on tax expenditures is more than the entirety of the general fund! That’s a lot of spending on certain priorities that most people never think about! (Those who favor small government in terms of fiscal policy should still prefer to eliminate tax expenditures and then use that money to lower tax rates…i.e. low rates and no loopholes instead of higher rates and loopholes that subsidize/spend money on certain activities).
In theory, Kentucky is considering reforming its tax code, but in practice it seems unlikely for anything to happen this session.
The 2014-2016 budget:
The budget is going to be debated by the general assembly, but the Governor has put out his budget proposal. The general theme is 5% cuts to everything except education. Many education areas are restored to their 2008 levels, and pre-school funding is expanded to cover children up to 160% of the poverty line. Higher education is cut by 2.5% instead of the full 5% cut. Kentucky Center for Economic Policy has a summary available here.
The problem here is that we have a situation that will pit poverty advocates against education advocates against public health advocates against environmental advocates etc. etc. The simple truth is Kentucky no longer brings in enough revenue to cover its basic expenses. (Since 2002 we’ve also been falling behind in our pension obligations, despite having relatively few pension commitments compared to other states). In 1997, the general fund was about 7.4% of state personal income. It’s now down to 5.6%. Going back to 7% would be an increase of 25%, enough to restore the funding lost since the recession.
Tax reform is a subject for another post, but this could be done through a combination of limiting tax expenditures, expanding the sales tax to cover services, and increasing the progressivity of the tax code (i.e. charging a slightly higher income tax rate to the wealthy). Without some sort of change Kentucky will be forced to continue to cut services and fall farther behind on pensions. I’m a big fan of preserving education and expanding pre-school. But it shouldn’t have to come at the expense of mental health services, vocational education, environmental quality or safety.