Kentucky is headed down a new road of economic policy: A state where people don’t pay income tax.
The Republican supermajority has made this conservative touchstone into reality, with a phased-in approach that will greatly change the balance of Kentucky’s economy. But as we move into the future, we’re still hampered by a $9 billion weight — tax breaks of every size from every decade, whether they work or not.
Every two years, the state budget office compiles a report on these “tax expenditures” as they are called. They are called expenditures instead of tax breaks because the loss of money comes right out of our general fund.
They include everything from the sales tax exemptions on food and medicine, which nears nearly $1.5 billion in fiscal year 2024, to a tax break on farm equipment for raising specifically “Chickens, Livestock, Ratite Birds, Llamas and Alpacas, and Buffalo” at a cost of $57 million.
Llamas, alpacas and buffalo have good lobbyists, apparently. Along with tombstone makers, boat makers and bourbon barrels. Tombstones have been sales-tax free since 1976, but coffins are still taxed.
And horses? Well, people who buy all most of the beautiful horses at Keeneland and Fasig-Tipton don’t pay sales tax on them, which costs the state almost $37 million a year.
These expenditures also include breaks we give to private developers, like tax increment financing districts — which allow developers to claw back some of their costs through tax breaks — and tourism tax credits, which will cost the state nearly $50 million on 2024, and $56.7 million in 2026.
What do these tax breaks do? Do they stimulate the economy or create jobs? No one knows because no one ever studies them.
No, hang on, that’s not entirely true.
In 2018, Rep. Ken Fleming, R-Louisville, put together a task force to study tax expenditures. He came to a simple conclusion. Keep only the top 10 most expensive because those actually help people. No one wants to add a sales tax to food and medicine. The rest — the tax break report is 197 pages long — you should sunset.
That was a big, bold message.
Guess what happened?
That’s right, not much.
A political horseshoe
Tax expenditures are a bipartisan problem, in that both parties like to create them. They’re also one of those things that people on either end of the political spectrum agree on. Andrew McNeill, president of the conservative Kentucky Forum for Rights, Economics and Education, a free market think tank, says they should go but probably never will.
“I’m totally opposed to this kind of corporate welfare. It more reflects the political [power of an interest or interest group than can be justified through an economic development perspective,” he said. “It’s the same poor policy choice that we’ve had in place for decades — there’s been very little appetite for seriously addressing it.”
His ideological opposite, Jason Bailey at the Kentucky Center for Economic Policy, an economics think tank in Berea, nonetheless agrees.
“The goal is to create a fairer tax system to create the revenue we need for the services people need and want,” he said. “Instead, these breaks go to people who have more power and wealth and are better able to pay taxes.”
They also agree the new pursuit of a zero income tax will have big ramifications, but for very different reasons.
McNeill says the revenue the state would get back from eliminating tax breaks could be used to speed up the elimination of the income tax.
Bailey says the money should go back to the general fund to help people, and incidentally, that the income tax erasure puts Kentucky on a headlong course with economic disaster. (See Kansas.)
But a lot of expenditures should still go, both agree.
“Any economist or any person from the left or the right who examines distortions in markets and tax policies see tax expenditures are ineffective and don’t make a lot of sense,” McNeill said.
The problem with special interest tax breaks is they usually have special interest lobbyists making sure they stay in place.
And if you’re a legislator, frankly, who needs the headaches of determining which tax breaks stay and which ones go?
Gov. Matt Bevin tried. He proposed ending film tax credits after a Herald-Leader story showed they were giving away more money than the state was making. But his own GOP legislature turned around and funded the program again.
The bigger question is philosophical: Why does Kentucky provide so much corporate welfare to private industry?
Hardly a development or tourism attraction gets built these days without generous handouts from the local or state government. Economic development incentives of the kind that lure big companies are a game played between states, and there’s always a question of how much difference they may have made.
There’s an argument that incentives and various tax deductions and these types of grant handouts are “primarily the tool of allowing politicians to claim credit for things that likely would have happened anyway,” McNeill said.
“Is Keeneland going to stop their expansion if they didn’t get $1 million from Lexington?” McNeill asked. “Probably not. But the political class wants to provide a check and have good relationships with these entities.
“It is largely a politics that drives most incentive and corporate welfare decisions.”
The GOP legislature is consumed with erasing the state income tax. Maybe they would get rid of these tax breaks in an effort to speed that process along.
But until then, you can expect to get the same report every two years with exactly the same handouts.