FRANKFORT, Ky. — Frustrated with the uncertainty surrounding an increasingly polarized Congress, state officials in Kentucky adopted a gloomy preliminary revenue forecast on Friday that predicts state taxpayers will have to cover a $200 million shortfall at the end of the fiscal year.
State economists met Friday to adopt the first planning estimates for the next five years. But they were having trouble predicting the future during the first year of the Trump administration, a sign that erratic behavior in Washington was beginning to trickle down to state governments. Friday was the first of three upcoming revenue estimates for Kentucky, with the final estimate not due until December.
“We could be here in December watching Twitter to see what is going on,” said Michael Jones, deputy executive director for policy and research for the Governor’s Office for Policy and Research.
President Donald Trump and Republican congressional leaders have promised sweeping changes since taking office, including repealing and replacing former President Barack Obama’s health care law and making substantial changes to the federal tax code.
But despite majorities in the House and Senate, Republicans failed to repeal the health care law. Senate Majority Leader Mitch McConnell of Kentucky has said he plans to move on to tax reform, which could have a profound impact on state budgets. But with little information to go on, Kentucky officials opted for a gloomy outlook when predicting state revenues.
“It’s really difficult to predict what policy changes might look like,” said Chris Bollinger, a member of Kentucky’s Consensus Forecasting Group that tells state lawmakers how much money they have to spend. “I could see a story where … the rancor continues and grows over the next year and a half and suddenly Democrats are swept into office and we have a complete change in policy that is none of the above. Then I don’t’ know where we are.”
Most state budget writers agree the uncertainty in Washington complicates their projections, according to Josh Hicks, executive director of the National Association of State Budget Officers. But he said most states have not adopted pessimistic outlooks as a result. He noted Kentucky is one of the first states to release such estimates.
Most sectors of the Kentucky economy are improving since the Great Recession. Personal income along with wages and salaries are increasing. Kentucky’s unemployment rate in June was at 5.1 percent, down from a high of more than 10 percent in 2010.
But Kentucky’s tax code is not built to capture that growth. The state finished the most recent fiscal year with a $138 million shortfall, forcing Republican Gov. Matt Bevin to make cuts and warn state agencies to prepare for more cuts in the future.
Part of the problem is the number of exemptions from the state sales tax lawmakers have carved out over the years. Every year, the state exempts more than $12 billion of state sales taxes. The state general fund is $10.6 billion.
“To the extent that you can get rid of some of those exemptions, you’ll broaden your base and your fiscal economy, i.e. your revenues, will flow more in lock step with the real economy,” said Greg Harkenrider, deputy executive director for the Governor’s Office of Economic Analysis.
Bevin has said he plans to call a special session of the state legislature this year that could deal with overhauling the state’s tax code and addressing its struggling pension system. He has said he wants to lower the overall tax rate while eliminating some sales tax exemptions, but he has not identified which exemptions he does not favor.
During his State of the Commonwealth address in February, Bevin said any plan to overhaul the state’s tax code could not afford to be “tax neutral,” suggesting it could contain a tax increase. But when speaking to WHAS radio earlier this week, Bevin promised he “personally will not sign” a tax increase.
“We’re not going to do that,” he said.