Study Shows Kentucky Tax System Needs Reform

LEXINGTON, Ky. (Feb. 6, 2012) – A study of Kentucky’s tax system concludes that the state’s recurring budgetary problems are due, in part, to the long-term decline in general fund revenue buoyancy — a measure of whether revenue is keeping pace with the economy. The study was a joint effort between the Martin School of Public Policy and Administration and the Center for Business and Economic Research (CBER), which is located in the Gatton College of Business and Economics at the University of Kentucky.

Citing the need to raise more revenue, Gov. Steve Beshear announced in early January the creation of a Blue Ribbon Commission on Tax Reform.  One of the goals of the commission’s work is to help create a tax system that is “elastic.”  According to the governor’s office, an elastic tax code “should allow state revenue performance to mirror economic performance.”

General fund buoyancy and elasticity are related concepts. Both are defined as the annual percentage change in general fund revenue divided by the annual percentage change in personal income. However, while actual general fund and personal income numbers are used to calculate buoyancy, adjustments are made when calculating elasticity to reflect any changes to the tax code that affect rates or what is taxed — also known as the base.

The UK researchers looked at 40 years of data to assess the performance of Kentucky’s tax system.  They discovered a gradual long-term decline in the ability of the revenue system to keep pace with the economy, especially since the year 2000.  Economics Professor William Hoyt, a co-author of the study and director of the Martin School, notes that “over the long term, revenue should change at approximately the same rate as the economy if the demand for government services and activities is more or less proportional to personal income. But our measure of this shows that revenue in the last decade or so has only grown about 70 to 75 percent as much as the economy.”

The study cites multiple reasons for the decline in general fund buoyancy.  Michael Childress, a co-author of the study who works at the UK Center for Business and Economic Research, said that “changes in the economy, such as the growth in the service sector, which is largely untaxed, and the growth of online sales, as well as an aging population, are all reasons that the state’s revenue performance has been lagging its economic performance.”

The report says that “while not the only factor causing Kentucky’s recurring budgetary problems, fixing the decline in general fund buoyancy will go a long way toward solving Kentucky’s structural deficit.” The study also states that “the decline in buoyancy will likely continue in the absence of fundamental tax reform.”

Digital copies of the report, "The Long-Term Decline in Kentucky’s General Fund Buoyancy," can be obtained below; at the CBER Web site at http://cber.uky.edu; by calling 859-257-7675; or sending email to cber@uky.edu.

MEDIA CONTACT:  Carl Nathe, (859) 257-3200; carl.nathe@uky.edu