State Budgets

Kentucky State of the State: Governor Bevin Commits to Tax and Pension Reform

To improve competitiveness, both tax reform and pension reform are desperately needed in the Bluegrass State.

Kentucky had an eventful legislative session last year after the state house switched party control for the first time since 1921, resulting in a Republican trifecta. During his 2018 State of the Commonwealth address, Governor Matt Bevin recounted the biggest accomplishments of his tenure so far, including the passage of right-to-work legislation and the repeal of prevailing wage. Governor Bevin pointed to the huge increase in capital investment, a record $9.2 billion last year crushing the prior high of $5.1 billion, as evidence of Kentucky’s improving economic competitiveness.

The governor stressed the need to “get the state’s financial house in order” by thinking strategically about what government dollars should and should not be funding. With a laser- sharp focus on “PIE” (protection, infrastructure, and education), his budget calls for a 6.25 percent spending reduction by eliminating 70 government programs and slicing administrative and overhead costs.

Pension reform was another major component of Bevin’s address. An anticipated special session at the end of 2017 to tackle this issue failed to materialize and is now at the forefront of the 2018 regular session agenda. According to the ALEC report Unaccountable and Unaffordable 2017, Kentucky’s public pension system is the 2nd worst-funded in the nation at 20.9 percent. This equates to $25,100 of unfunded liability per capita. Bevin acknowledged the state has historically failed to pay the full ARC or the annual required contribution. Enthusiastic applause greeted his declaration that “this year they will be funded in their entirety for the first time in the history of the Commonwealth of Kentucky.” Governor Bevin demonstrated his understanding of the structural flaws of the pension system with his proposal last year to vastly improve the system’s sustainability. The governor can further his agenda by educating the public that simply diverting more money into the current system cannot resolve the long-term problem.

The Bluegrass State currently ranks 33rd in economic outlook according to the 10th edition of Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, largely due to the state’s uncompetitive tax structure. Kentucky has one of the highest top marginal tax rates on both personal and corporate income (state and local combined) and also levies an inheritance tax. Governor Bevin addressed the need to tackle comprehensive tax reform and promised that “it is coming.” If Kentucky can successfully accomplish both tax and pension reform this session while simultaneously balancing the budget, the state will be on the right path for a much brighter economic future.

In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace…

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