Date: 06-26-2017
Bevin to call special legislative session this summer, will seek tax raise to settle pension problems
FRANKFORT, Ky. — In a short campaign pitch submitted to the Courier-Journal last year, Republican candidate for state representative Jason Nemes closed with a tried and true message.
“I … will not vote to raise taxes,” promised Nemes, who was ultimately elected.
That pledge was hardly unique among Republicans last year who swept to historic gains and seized a supermajority in the Kentucky House.
Such promises also illustrate the difficulty Gov. Matt Bevin faces as he develops a tax reform plan — along with major pension system fixes — to address the state’s multibillion-dollar public pension crisis.
“I think the governor is absolutely committed to fundamental tax reform,” said Chris McDaniel, a Taylor Mill Republican who chairs the Senate budget committee. “… Now, the odds of anything getting passed? I don’t think there’s anything harder to do than tax reform. Even if it’s revenue neutral.”
In a letter this month, the governor cautioned lawmakers not to believe rumors and made clear “our administration has made no final decisions” on how it will propose to change the tax code. He said he will call a special legislative session this year to consider tax and pension reform proposals. He put no date on that session, but said it will not begin before Aug. 15.
Bevin spokeswoman Amanda Stamper said this week that the administration “continues to work with and gather input from members of the legislature, as well as many internal and external stakeholders” as it develops proposals to be offered at a special legislative session this year.
A special session would cost more than $63,000 a day, according to the Legislative Research Commission.
In interviews this week, key lawmakers emphasized the plan is not final. But they acknowledged any tax bill will test the governor’s salesmanship skills with his Republican allies, who also have a supermajority in the Senate.
And, although the governor warned in February his proposal would likely slaughter some sacred cows and be a tough vote, the lawmakers said there’s more of a political opening for a proposal that would not raise taxes immediately — a revenue-neutral mix of changes and loophole closings with a goal of sparking the economy and producing stronger revenue growth.
Senate Majority Leader Damon Thayer, R-Georgetown, said that while passing pension changes will not be easy, “the tax piece is going to be way more difficult than the pension piece. The tax piece is much harder to define. There are regional-specific issues, and industry-specific issues, and competitiveness issues that make it difficult to get it done.”
Recent history is not encouraging.
The last major tax increase in Kentucky happened in 1990, and that passed only after the Kentucky Supreme Court ruled that the state public school system was unconstitutional. The big tax hike followed years of campaigning by education advocates, with most of the new revenue going to the consensus priority program of public education. And even it did not pass easily.
Govs. Brereton Jones, Paul Patton and Steve Beshear all launched studies or proposed comprehensive reforms that fell flat — with lawmakers accepting a few selected provisions in those plans, but shunning fundamental change that would have raised big money.
In 2004 Republican Gov. Ernie Fletcher proposed a “modernization” of the Kentucky tax code that was billed as revenue-neutral. It failed, but a modified version passed in 2005.
In his State of the Commonwealth address in February, Bevin outlined the severity of the pension crisis — a debt that he said is actually more than double its official amount of nearly $40 billion. And he warned lawmakers that a tax proposal to address that big of a problem “is not going to be a tax-neutral tax plan. It’s not. We can’t afford it to be.”
In his letter to lawmakers June 6, Bevin noted that a consultant recently found that pension plans will need an additional $700 million a year — a sobering number (equal to nearly 7 percent of annual state General Fund revenue) that threatens funding of basic state services like K-12 education, public safety and higher education.
But in the letter, the governor offered only a general description of his direction. “I believe we can make Kentucky’s tax code simpler and more competitive with surrounding states like Indiana and Tennessee by lowering or eliminating certain taxes, while at the same time generating sufficient revenue through economic growth and closing special interest loopholes,” he wrote.
Thayer said Bevin’s comment in February can be interpreted in different ways. “But I want to be clear — I’ve said this publicly and privately to anyone who’ll ask — there’s no appetite to raise taxes in Kentucky amongst Republican legislators. However, there is support philosophically for what the governor wants to do — which is make a more business-friendly tax code responsive to a growing economy.”
House Majority Leader Jonathan Shell, R-Lancaster, urged patience until Bevin unveils his plan.
“I think we can get a tax bill through,” Shell said. “I think it just depends on what that tax bill is.”
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Asked if he believes a bill that raises taxes could pass, Shell said, “Those are the rumors I’ve talked about. Rumors are expecting the governor to propose some big tax increase, but he’s not said that. He’s said the state needs more revenue, and it does.”
Shell said revenue can be raised with a reform plan that is revenue neutral yet sparks job creation and economic growth.
For his part, Nemes said, “If we’re voting on Tax A and whether to raise Tax A in a vacuum, the answer is no. If it’s an overall package and Tax A may go up a little bit and Tax B goes down, things are transferred around and the whole plan is designed to incentivize growth, then I’m for it.”
Rep. Jim Wayne, D-Louisville, has filed tax reform bills in the General Assembly for 18 years and not yet gotten even a committee vote.
“Any time you deal with taxes, members get scared,” he said.
That fear remains an obstacle, Wayne said. And while he does not expect Bevin will propose a type of reform anything like the reform approach he continues to push, Wayne said he’s keeping an open mind.
“I think the governor has to be congratulated for wanting to tackle tax reform and also for linking it to the pension crisis,” Wayne said.
Shell said, “Everybody’s working on this on a daily basis, trying to make this happen. It’s not like people are sitting back. My mindset is let’s give the governor time. Let’s get this right.”
By Tom Loftus
The Courier-Journal