State can’t just tax pension woes away

Published 12:09 pm Monday, August 6, 2018

Gov. Matt Bevin hosted a town hall meeting last week in Murray. It is not surprising that his audience of about 100 people included teachers and others on the state payroll.

The discussion turned to the state’s teetering public employee pension funds. What we find striking about the conversation is the magical thinking that exists in some quarters believing Kentucky can simply further raise taxes, keep the system we have, and everything will be fine.

One attendee who teaches at Murray State University recited the new liberal mantra that tax credits and other incentives Kentucky provides to corporate citizens are “expenditures” just as money used to build roads or pay for worker benefits. Taken to its logical conclusion this view says that every penny that falls through to the corporate bottom line is rightfully the government’s. To the extent government does not seize this money, that’s an “expenditure.”

The professor used this premise to suggest that “if we could get 30 percent of that money back, 20 percent of that money back, then all of a sudden we have 20 to 30 percent more revenue coming into the state.”

The problem with this view is that many of these credits exist as incentives for corporations to increase their investments in the state. There are exemptions and credits for instance for purchases of new equipment used in manufacturing and production.

Such investments are desirable for two reasons. One is that they often involve expansions, which means more jobs and associated tax revenue. The second is that they increase productivity per worker. Historically rising private sector wages do not occur absent productivity gains.

Bevin pointed out a second flaw in the idea of eliminating these credits. It is that capital is mobile. Surrounding states, notably Tennessee and Indiana, already treat corporate citizens more favorably than Kentucky with their own credits and incentives. The results are apparent.

“Go just a little bit east of here, go down to the Fort Campbell community and look at the border (with Tennessee). Look at the activity on our side of the border versus the other . Look at the number of warehouses that are literally on that side of the border and not on ours,” Bevin said.

Regional economic development officials have lamented this reality for generations. As Bevin told his audience, “capital goes where it is welcome.” Raising corporate levies by 20 to 30 percent by “closing loopholes” will not result in 20 to 30 percent more revenue. Rather, it will bleed tax revenue as corporations move to friendlier locales, taking not only their tax contributions but those of their workers with them.

More broadly, this is the reason we have been so concerned about the state’s pension debacle these past few years. The idea Kentucky can just tax its way out of this mess is fantasy.

As Bevin said at the town hall, the pension fund covering most state workers other than teachers is down to $1.9 billion, or about 16 percent of what it owes. Frighteningly Bevin says the fund paid out $1 billion in benefits last year but only brought in several hundred-million.

“So play that out,” he said. “We only have three to five years before that’s all gone.”

Bevin made a brave try politically not so much to save the pension funds as to buy them more time. But he has been stymied by Republicans and Democrats alike. The consequences are just a few years away now, and they won’t be pretty.

The Paducah Sun