February 23, 2000
I didnt run for Governor of Kentucky to preside over a state that was content to stay near the bottom of most of the indices that people associate with a good quality of life.
I ran for governor to change Kentucky and set us on a path where, 20 years from now, we wouldnt be near the bottom but rather much nearer the average of all our sister states in overall quality of life.
Consequently, I have challenged us to address a myriad of subjects; most of them controversial, because its the hard things to do that will make a difference. If it were obvious and easy it would have already been done.
During my first term, as the legislature acted on a number of issues, it sometimes approved, sometimes rejected, more often modified, improved, adjusted, did part, rejected part of our suggestions.
Thats the legislative process and I respect it. I havent always agreed but then nobody said I was always right. It is our responsibility to establish the starting point. The legislature makes the final decision.
At the beginning of this term, I articulated an aggressive agenda. It has precipitated a lot of debate.
I expect that before my second term is over the legislature will have addressed most of the topics Ive raised and I have faith that, one way or the other, we will move forward in these areas. I didnt expect to get all these subjects addressed in this session.
Now that weve had the advantage of almost a month of public debate on our budget and our Revenue Recovery and Fairness proposal, the time has come to determine what we can and cannot do in this session.
Our primary goal for the use of the additional revenue to be generated by our proposal is education. I have said it several times and Ill say it again, the highest priority of our administration is education, education, education, and education.
Were addressing the educational needs of our youngest citizens with the proceeds of the tobacco settlement. But the rest of our education agenda is financed by the General Fund, or more precisely by the increase in revenue produced by our Revenue Recovery and Fairness proposal.
We propose to generate $144.5 million dollars in the second year of the biennium and $103 million of that will go to education -- $10 million to adult education, $18 million to elementary and secondary education, and $75 million for postsecondary education.
I think that proves that the agenda of this administration is education, education, education, and education.
Im pleased that there has been virtually no criticism of our proposed expenditure plans. The debate has been about how we plan to pay for it.
The purpose of our Revenue Recovery and Fairness proposal is threefold. One objective is to recover about three-fourths of the revenue reductions, which have been the results of several tax, cuts implemented during my first term.
Secondly, we propose to realign our revenue-generating system so that our revenue will grow better in response to a growing economy to more nearly meet the growing needs of our society.
Thirdly, we propose a comprehensive revision of our tax code to make it more equitable between the various elements of our society.
The third part of our proposal has proven to be the most controversial and the element, which is going to need a lot more debate before we take final action.
I am therefore recommending to the General Assembly that most of our recommended changes in our tax code be put into abeyance and that a task force of decision makers be created to study this subject in depth for action at a later time.
I am recommending that three of our proposed changes be enacted to satisfy the first two elements of our program. I propose to require limited liability corporations to pay the same corporate license tax as regular corporations. This doesnt generate a lot of revenue, $2.5 million in the second year of the biennium, but it will slow down the accelerating loss of revenue we are experiencing because of the rapidly increasing rate of conversion to this new type corporation as the graph shows.
We have been experiencing a substantial drop in corporate support for state government in a lot of other ways, a phenomenon that has manifested itself over the past decade in several ways as this second graph shows. We dont fully understand why this is happening and this is one of the reasons we think a delay of the consideration of a comprehensive reform of our entire revenue generating mechanism will be helpful.
Secondly, I recommend that we compute the growth of real property for the purpose of state property tax the same way as we compute the growth for local property. This again will not generate a lot of revenue, $11.3 million in the second year of the biennium, but it will allow the property tax revenue to grow more in line with the growing needs of our society. The state real property tax rate has dramatically dropped over the past 20 years as this third graph shows. Even with this change the rate will continue to drop in the future.
The major change we recommend be enacted is the substantial revision in the way we tax communication services to generate revenue for state and local governments.
By exchanging a hodgepodge of state and local taxes and fees with a 7% excise tax on these services we can generate the revenue necessary to meet the most pressing needs of our people during the next two years and replace a cumbersome, inefficient, stagnant source of revenue for state and local governments with an efficient, easily administered, growing source of revenue for the future. This is expected to generate $50.8 million in the first year of the biennium and $106.9 million in the second year. It will be a struggle to accommodate these reductions and we are beginning a review of the budget to find places these cuts can be made. Over the next month or so we will negotiate with both houses of the General Assembly and hopefully end up with a progressive budget which will move Kentucky forward as far as our General Fund expenditures are concerned.
These three changes will generate $57.3 million in the first year of the next biennium and $120.7 million in the second year of the next biennium. This will still leave our proposed budget $85.9 million short of the amount we originally intended to generate in the first year and $23.8 million short in the second year.
The Road Fund is a different matter. As accurate and justified as our proposed Six-Year Highway Plan and the needed revenue measures we recommended are, the unusually high price of gasoline has made it politically impossible to pass our proposal at this time. I do not retreat one inch from my assertion that the increase I proposed is necessary if we are to build the roads the legislature has already voted to build but I do accept reality and I am prepared to revisit this subject when the economic and political situation is more favorable.
These changes in our original proposal are a reflection of our understanding of the opinions of a lot of Kentuckians and a realization of the real compromises, which must be reached if we are to get any meaningful action out of the legislative process.
These actions are not all I think are necessary to move Kentucky forward but they are all I think we can reasonably expect to be achieved during this session. This will be progress. There will be more time to address the unmet needs of Kentucky in the next four years.