A Tale of Two States
Kentucky should learn from success in Texas

Charles Dickens’ classic, Tale of Two Cities, can easily be parodied in a modern version: “Tale of Two States – How Each Addressed its Budget Woes.” The dawn of 2003 greeted both Texas and Kentucky with “crisis” budgetary problems. The similarity stops there.

Texas faced the New Year nearly $10 billion in the hole, representing 16 percent of what it spends in general revenue. Rather than knee-jerk demands for tax increases, Texas Governor Rick Perry and the legislature required agencies to produce cuts of 13 percent. Zero-based budgeting was instituted.

Texas approved a budget containing not one cent in new taxes and still was able to invest in jobs, a proven revenue generator. Instead of spending every dime of federal assistance, Texas set aside hundreds of millions of dollars to deal with bumps along the road to economic recovery.

Governor Perry believes that the wealth of Texans is not defined by how much money is in the government coffers, but how much is in the taxpayers’ pockets. His approach to job creation has been to encourage private sector ingenuity by removing impediments of high taxes, over-regulation and frivolous litigation.

To deal with the negative economic effects of rampant litigation, Texas passed the most sweeping lawsuit reforms in America. Lawmakers capped arbitrary non-economic damages. To avoid delays that could ensue for years, Texas voters approved a constitutional amendment giving legislators authority to limit damages in all civil cases.

Now enter Kentucky, 2003. To address budgetary woes, the incumbent governor proposed (and some state newspapers promoted) tax increases of $543 million for the fiscal year beginning July 1, 2003. Some $340 million of that increase would have fallen to Kentucky businesses – a real body-blow to any hope for job creation.

The Kentucky Senate said no to the governor’s tax increases, and the legislature balanced the budget primarily through spending cuts. To its credit, the legislature exercised tax restraint in the knowledge that maximum taxes on businesses represent a shortsighted policy, since business activity equals jobs and jobs equal revenue to fund government programs.

A review of some facts regarding state government spending is very instructive relative to tax policy and potential reform and modernization. For the period of 1990 to 2001, Kentucky ranked sixth highest among all states in growth of per capita state general fund spending.

Runaway spending by Kentucky’s state government – essentially doubling between 1990-2001 – has greatly outstripped growth in personal and corporate incomes. Such growth should have been sufficient to fund all essential programs and create a strong surplus. Politicians must learn the discipline of saying no to spending, which has been growing exponentially.

There is a point beyond which citizens, both corporate and individual, will not tolerate further government confiscation of their incomes. Runaway spending by governments at all levels cannot be sustained and threatens an economic system of private enterprise that is a model to the world.

Associated Industries of Kentucky, an alliance of more that 3,000 member companies, has recently issued a position paper comparing Kentucky’s tax system to other states. The document examines major business taxes in all 50 states and shows that “Kentucky imposes a wider range of such taxes, at relatively higher rates, than any other state in the nation.”

This document was researched and prepared by private sector tax experts and should be studied by all officials in Kentucky who have responsibility for tax policy. Careful analysis clearly shows that too much spending rather than too little taxation is the Goliath of Kentucky’s budgetary problems.

Debate on tax policy and reform must be elevated beyond simply increasing taxes. Dramatic tax increases on businesses can kill the goose that laid the golden egg – jobs. No jurisdiction can tax itself into prosperity, an economic axiom worth remembering.

Pat Freibert is a former Kentucky state representative from Lexington
editorial@lanereport.com

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