Economists are predicting that Kentucky will bring in slightly more tax revenue over the next two years, but the state is also facing increased financial obligations that will likely eclipse the increase.
On Tuesday, the Consensus Forecasting Group — a panel of economists hired by the state to make revenue predictions at the end of each year — said that tax revenue will increase just 1.3 percent in the upcoming fiscal year and 1.8 percent in the year after that.
The increase translates to $146 million in new revenues in the 2021 fiscal year that begins next July and $207 million in the year after that.
And that new money will likely be outpaced by growing costs in the state’s systems for pensions, corrections and Medicaid, among other obligations.
Jason Bailey, executive director of the progressive Kentucky Center for Economic Policy, says that lawmakers need to find a way to raise new revenue in the upcoming legislative session.
“If they don’t raise serious new revenues I think there are going to be harmful cuts to a lot of things that matter in communities where legislators are facing reelection this year,” Bailey said.
The Consensus Forecasting Group also predicted that the country will go through a recession in the coming years.
Among the costs the state will have to absorb over the next two years is an estimated $121 million school safety bill, which lawmakers passed last year but did not fund.
The state will also have a larger pension tab after Kentucky Retirement Systems, the agency that manages retirement for most state employees, increased its employer contribution from 83 percent of payroll to 90 percent.
And Kentucky will have to pay a larger share of the cost of its expanded Medicaid system. The federal government pays 95 percent of the costs, but that rate goes down to 90 percent starting next year, resulting in a $50 million cost increase for the state.
Bailey says that tax breaks and a shift to more unreliable revenue sources granted by the legislature in recent years have weakened Kentucky’s money-making ability.
“They gave away a lot of money the last two sessions. If they hadn’t done that, we still would have budget challenges for sure, but those decisions have made things a whole lot worse,” Bailey said.
Last year, lawmakers exempted Kentucky’s local banking industry from paying the franchise tax, a loss of about $106 million per year.
In 2018, lawmakers made several tax changes, including an expansion of the sales tax to 17 previously-exempted categories and a flattening of the individual and corporate income taxes.
The changes netted more $480 million in revenue, mostly because of a 50 cent increase to the cigarette tax, which is predicted to dwindle in coming years.
Lawmakers write a new state budget every two years. Newly-inaugurated Democratic Gov. Andy Beshear will officially get the conversation started with a budget proposal that will be presented to a joint session of the legislature in January.
But the Republican-dominated legislature is in charge of most of the budget-writing process. Beshear has the power to line-item veto elements of the budget, but lawmakers can override vetoes with a simple majority vote.
Beshear has proposed across-the-board $2,000 pay increases for teachers, increasing education funding and restoring cuts to higher education made by former Republican Gov. Matt Bevin.
Beshear has proposed funding those initiatives by legalizing casino gambling in Kentucky and taxing proceeds from the industry. But Republican leaders of the legislature have said the gambling proposal is a non-starter.