Kentucky Economic Justice Alliance

Fletcher's Tax Agenda Helped Create Health Insurance Crisis

By Jason Bailey

One of Governor Ernie Fletcher's recent claims is that the teacher and state worker health insurance disaster would be less severe if the legislature had passed Fletcher's tax reform package. But the real relationship between those two issues is that the governor's approach to tax reform helped bring the current crisis about.

As a new governor, Fletcher had the leeway to set the state's agenda early on. He acknowledged the long-standing problem of Kentucky's failing tax system in his State of the Commonwealth Address and urged the legislature to work with him for its complete overhaul.

Governor Fletcher's reform agenda could have included new revenue to make up major budget shortfalls and allow expanded investments in areas Kentuckians care about, including education, health care, human services, environmental protection and economic development. In doing so, he could have opened the door to pivotal changes in our state's history not unlike the 1990 passage of the Kentucky Education Reform Act. Such leadership might have taken cues from recent advances in states like Virginia, Nevada, Nebraska, and Connecticut.

Instead, Governor Fletcher narrowed the discussion by declaring that any tax reform package had to fit the "no new tax pledge" signed by the governor and 48 legislators. It therefore had to be "revenue neutral," meaning the plan could raise no new money overall. Rather than the wholesale changes needed to stop program and service cuts and invest in our future, Fletcher--it seemed at the time--would consider only politically safe, minor adjustments.

The plan that was finally released was all that, and worse. Parts of Fletcher's proposal seemed right off the shelf of anti-government extremists like Grover Norquist (founder of the "no new tax pledge"), who told The New York Times this summer that he hopes "a state goes bankrupt" as a way to force cuts in health care, education, and other critical investments.

The plan that came out was revenue neutral in the immediate term (promising a pitiful 0.1% gain the third year). But it also lacked several of the structural changes that comprehensive reform was supposed to address. It included new priorities: tax cuts heavily skewed to the wealthy and a lowering of the tax rate for corporations. And it included a "trigger" measure that threatened to bring about major budget cuts in the not-too-distant future. The plan's shortcomings include:

Fletcher's revenue-neutral package meant no new money to deal with the immediate state budget crisis. That includes the estimated $1.3 billion Medicaid shortfall Kentucky is facing this year and next, the cuts to legal services, the double-digit tuition increases for students at colleges and universities, and now the increase in health insurance costs for teachers and state employees.
Fletcher left out of his plan a key measure needed to bring the tax system up-to-date: the expansion of the sales tax to services. Eager to avoid introducing new taxes in an election year and loathe to anger powerful service industries, Fletcher dismissed a reform experts agree is critical to bringing our tax system in line with today's economy.
The biggest source of new revenue in Fletcher's plan was an anemic cigarette tax increase, which public health advocates said was not enough to deter teen smoking. And as a revenue source its fix would be temporary, since cigarette tax revenues grow slower than most other taxes. That means new budget holes in the future.
Fletcher's income tax proposal would have given the wealthiest 1 percent of Kentuckians an average tax cut of $1,686 (while lowering income taxes on the poorest 20 percent just $83 on average). And his long-overdue proposal to close some corporate loopholes was neutralized by a measure to cut the top tax rate for corporations at a loss of $70 million to the state.
Most dangerously, the governor included a controversial "trigger mechanism" designed by anti-tax groups that would, over time, force further reductions in critical public services by capping the amount of revenue Kentucky can collect. A similar law in Colorado forced cuts to 17 percent of the state budget between 2001 and 2003, reductions that ranged from children's health insurance to universities and highways.

By setting an agenda that excluded new revenue and by proposing a package that was inadequate, unfair, and damaging in the long term, Governor Fletcher helped bring Kentucky to the edge of our current cliff. Whether we go over depends on our willingness to turn this discussion around. That requires leaders who are willing to support real tax reform that raises the revenue needed to fix our present mess and build a better, more prosperous future.

Jason Bailey is co-director of the Democracy Resource Center, a research and education organization that is a partner in the Kentucky Economic Justice Alliance.