Back to Goal 18From Measures and Milestones 2002
p. 54-55, published 2002
The new millenium has brought renewed attention to the adequacy, fairness, and competitiveness of Kentucky’s tax structure, as well as the state’s regulatory climate. Only an adequately funded public sector can accommodate the needs that will arise from economic growth—the ultimate goal for our state’s future. Citizens assign only a moderate level of importance to this goal and report seeing little evidence of progress. This goal ranked third from the bottom on our scale of aggregate citizen assessments of progress.
Table 1: Where Citizens Think We Stand
After steadily increasing throughout the early 1990s, Kentucky’s Budget Reserve Trust Fund (Rainy Day Fund) ultimately served its original purpose in 2002, filling in the fiscal gaps created by an ailing economy. In years to come, it is essential that we replenish this fund to prepare for unforeseen events that we cannot control such as economic downturns, as well as other fiscal pressures, such as the anticipated impact of our aging population. In either case, an adequate Rainy Day Fund will, as it did in 2002, help ease future financial shortfalls.
Figure 1: Budget Reserve trust Fund Balance, 1990-2002
A 1999 study by the Barents Group remains the benchmark for measuring the performance of Kentucky’s tax structure against that of other states. Barents found that Kentucky has a competitive business tax structure. Kentucky’s state and local business tax system ranks 10th highest of the 15 study states in terms of overall tax competitiveness across all of the study industries. The chart at the right shows the effective tax rate for Kentucky and 14 “competitor” states. State and local income, property, and sales taxes are included. Kentucky’s effective tax rate is 10.6 percent. The average for the region is 11.57 percent. The effective tax rate is a 19-industry average.
Figure 2: All State and Local Taxes
As an objective view of a government’s fiscal health, bond ratings significantly influence government operations. Low or declining ratings signal that a government is experiencing fiscal hardship and is thus an investment risk. This in turn increases the government’s cost to borrow money. High or increasing bond ratings mean lower borrowing costs and an enhanced fiscal reputation. Kentucky held a high-grade, high-quality general obligation rating from two major bond rating agencies throughout the bulk of the 1990s, reflecting exceptional management of financial operations and conservative fiscal policies. Despite its generally favorable outlook of Kentucky over this time period, Standard and Poor’s issued a warning in October 2001, giving the Commonwealth a negative outlook for its bonds due to their concern about the state’s liquidity and lack of a structurally balanced budget.
Table 2: Kentucky State Government Bond Ratings
In spite of its importance to business development and industrial recruitment, we are unable to identify a reliable measure of the state’s regulatory structure relative to other states.
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