Kentucky Legislators Shouldn’t Bail Out Pensions With A Tax On Workers and Smokers

Every year state legislatures take a close look at their books to decide how to address budget gaps. Taking the lazy (and costly) road, many states have tried to raise taxes to address budgetary shortfalls, and Kentucky is no different. State Rep. Jim Wayne has proposed to “reform taxes,” to bring in more revenue. The truth is that Wayne’s reforms are thinly-veiled tax increases that are supposed to raise about $815 million per year in additional tax revenue.

As part of his proposed tax increases, Wayne wants to raise the income tax rate from 6 percent to 6.5 percent for persons with adjusted gross income of $150,000 or more and increase the cigarette tax from $.60 per pack to $1.6 per pack, a 167 percent increase. Before Kentucky legislators ask for one more nickel in extra taxes, wasteful and bloated government spending needs to be addressed.

The biggest area of concern for Kentucky state legislators should be the state’s unfunded public pension liability, which is estimated to be a staggering $34.5 billion. And even that figure likely understates the size of the pension liability given how generously the government’s actuaries discount pension liabilities.

It’s appropriate to refer to the pension problem in Kentucky as a time bomb. But there is already ample evidence that the bomb has already gone off for many county governments. Contributions to pension funds by those governments are calculated as a share of payroll. Essentially, it means that the more people on staff, the larger the required pension contributions.

As the required share of payroll has increased, county governments have been compelled to stop replacing retirees or otherwise trim payrolls. For local taxpayers, that means fewer public services at higher-than-necessary costs. Handing more money over to the lawmakers who designed this program should be a laughably absurd idea.

Unfortunately, Rep. Wayne’s proposal to bailout the poorly designed and now-failing public pension program is to raise taxes on middle-income earners and smokers.

Transferring wealth from individuals to a bloated and inefficient state through a higher income tax rate is counterproductive to personal wealth creation and could cause an exodus of those wage earners.

Proponents of tobacco tax increases believe it could raise millions of dollars, but history has shown that proposition to be Fool’s Gold by not raising projected revenue. The Minnesota State News pointed out that “Since 2003 there have been 57 cigarette tax increases across the nation and 68% of them have failed to meet projected revenues. In 2006, New Jersey raised cigarette taxes with the hope of pulling in $30 million in extra revenue each year.  Not only did the tax hike fail to bring in extra revenue, but the state actually collected $20 million less in cigarette sales.”

Rep. Wayne has acknowledged that tax legislation is unlikely to pass in this session but taxpayers need to be on guard at all times.  Kentucky will gain a competitive advantage with businesses looking to relocate or citizens looking to move with lower taxes and a less bloated and inefficient government.