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January 6, 2010

Nip/Tuck

The state is facing a dire fiscal crisis, and the governor’s latest round of cuts is only skin deep

Do no harm. That’s essentially the basis for the Hippocratic Oath: Whatever you do as a doctor, try to avoid chopping off your patient’s head.

If you’re a lawmaker in Kentucky facing a projected $1.5 billion budget shortfall, inflicting some degree of harm will be inevitable, as Gov. Steve Beshear’s latest budget reduction order — his sixth, clocking in at $108 million — does little to stop the bleeding.

But not for lack of trying: The governor slashed Medicaid income support by 45 percent, decreased public health spending by 8.2 percent, and cut funding for the already-siphoned, riot-ready adult corrections system by 11.4 percent.

One area spared the knife was SEEK — the funding program for Kentucky public schools — which is essentially the state’s entire pre-school through high school budget, thereby avoiding a scenario Kentucky Department of Education spokeswoman Lisa Gross says would have set us back to “pre-1990 levels,” when students were required to scavenge for pencils, paper and opportunity.

“There’s no easy solution to this,” Gross says. “What most people don’t realize is even if we get another source of revenue, that’s not going to fix everything at once.”

Gross is right. The other half of this budgetary nightmare story has more to do with the systemic ailments plaguing the commonwealth’s broken revenue system than the political and fiscal considerations of the Beshear Dynasty. And no one solution by itself — be it further tax hikes on cigarettes and beer, expanded gambling (which would yield only $300 million in potential new revenue) or fundamental tax reform — is a panacea.

In labored medical terms, Kentucky lacks the substance known as bone barrow (i.e., a rational tax system), which means we aren’t generating any blood (i.e., money) to pump through our bloated, KFC-clotted veins, which makes things like living (i.e., enjoying a functional government) rather difficult.

“[The shortfall] was predicted back in 2002,” says Rep. Jim Wayne, D-Louisville, “when we did a study that showed we would be over $1 billion short by the year 2010, and that’s without a financial crisis. So what we’ve done for the last eight years is patch together a budget that wasn’t a sound budget.”

According to Wayne, Kentucky has essentially funded itself by “stealing from multiple pots” — collecting money via the dues owed by members of state professional boards — like, for example, the charitable gaming commission, which oversees every aspect of the Kentucky church bingo industry. Do this several dozen times and before you can say, well, “Bingo,” a shoestring budget has been created.

Wayne’s pre-filled bill, BR-2, is co-sponsored by three other members of the state House and aims to alter the underlying revenue structure into a more sustainable — and equitable — form.

Given the political realities in Frankfort, specifically the partisan rancor and inertia that thrives there, any tweaking of the state’s tax code has already been labeled by both the governor and GOP Senate President David Williams, R-Burkesville, as a tax increase, and therefore a no-go. Because there’s nothing voters hate more than a “broad-based” tax increase, except when it isn’t that at all.

The Kentucky Legislative Research Council’s assessment of BR-2 illustrates that the only new taxes created by the bill would affect the wealthiest in the state, raising their income taxes by 1 percent, while providing income tax credits for the poor and middle class and increasing overall revenue — $546.1 million by 2012, when the Mayan zombies eat us — at the same time.

“It is a tax increase” Wayne continues, “but only for the top 5 percent. The standard we use is fairness. Right now, the rich cannot use the amount of money they’re paying and say that’s fair, compared to the amount the poor are.”

Wayne’s assertions are backed by fact: Research conducted by the Institute of Taxation and Economic policy show that, in 2007, a non-elderly family earning roughly $23,000 a year pays 10.8 percent of their income in taxes, whereas those earning $346,000 (or more) are subject to a 6.1 percent rate.

Speaking of political realities, the elements of Wayne’s bill that would likely provide the most resistance (aside from taxing the state’s wealthiest) would be the imposition of several new “service taxes” designed to squeeze jet-setting, golf-playing tycoons — which pretty much describes a large swath of Wayne’s Frankfort colleagues and their respective benefactors — by levying surcharges onto greens fees, chartered commercial flights and professional landscaping services, among others.

“Entertainment for working-class folks is taxed now already,” Wayne says. “Every time you buy a ticket at Six Flags you’re being taxed. One of the things this bill aims to do is tax the wealthy in the same way.”

Mary Lassiter, the state’s budget director, also sees the problem being rooted in the tax system.

“Kentucky, like most states, is largely dependent on taxes for revenue,” she says. “But with high unemployment, the fact that 75 percent of our income is generated by income and sales taxes is bad news. The real issue is what resources do we have versus what do we need to spend to keep the state from falling further behind.”

As of now, major institutions remain about as intact as they were following the last round of cutting (which was more severe at $494 million), with some programs like Medicaid propped up primarily by federal stimulus money.

Yet that money is about to run out. Coupled with a $219 million state rainy day fund that’s completely tapped out and a minimal round of cuts to ring in the New Year, it won’t be long until Beshear signs his seventh budget reduction order. Unless, of course, the 2010 General Assembly manages to simultaneously pass gaming and tax reform bills.

And if you believe that, I’ve got a severed head I’d like to sell you.