Childress, Michael T.

Hoyt, William

English

University of Kentucky

University of KentuckyUKnowledgeIssue Brief on Topics Affecting Kentucky’s Economy Center for Business and Economic Research2-2012The Long-Term Decline in Kentucky’s GeneralFund BuoyancyMichael T. ChildressUniversity of Kentucky, michael.childress@uky.eduWilliam HoytUniversity of Kentucky, william.hoyt@uky.eduRight click to open a feedback form in a new tab to let us know how this document benefits you.Follow this and additional works at: https://uknowledge.uky.edu/cber_issuebriefsPart of the Economics CommonsThis Brief is brought to you for free and open access by the Center for Business and Economic Research at UKnowledge. It has been accepted forinclusion in Issue Brief on Topics Affecting Kentucky’s Economy by an authorized administrator of UKnowledge. For more information, please contactUKnowledge@lsv.uky.edu.Repository CitationChildress, Michael T. and Hoyt, William, "The Long-Term Decline in Kentucky’s General Fund Buoyancy" (2012). Issue Brief onTopics Affecting Kentucky’s Economy. 5.https://uknowledge.uky.edu/cber_issuebriefs/5Center for Business and Economic ResearchISSUE BRIEFon topics affecting Kentucky’s economyDr. Chris Bollinger & Dr. Ken TroskeCBER Co-Directors335BA Gatton BuildingLexington, KY  40506-0034(859) 257-7675, (859) 257-7671 (FAX)http://cber.uky.eduThe Long-Term Decline in Kentucky’s General Fund BuoyancyBy Michael Childress (michael.childress@uky.edu) & William Hoyt (whoyt@uky.edu)Kentucky’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.1 There are several economic, demographic, and poli  cal factors con-tribu  ng to the gradual reduc  on in buoyancy.2 Given the systemic nature of these changes, the long-term decline in general fund revenue buoyancy will likely con  nue in the absence of tax re-form. Here, we do not assess whether government spending is too high or too low, or if the size of government is too big or too small. If policymakers desire government spending to remain ap-proximately propor  onal to the size of the economy, then general fund buoy-ancy determines whether suffi  cient revenue is available to do so without frequent increases in tax rates. This analysis illustrates the long-term de-cline of Kentucky’s general fund buoy-ancy, compares it to other states, and discusses some of the causes.While year-to-year vola  lity is typical, over the long term revenue should change at approximately the same rate as the economy if the demand for government services and ac  vi  es is more or less propor  onal to personal income. A buoyancy of 1.0 indicates that revenue growth is keeping pace with economic growth, while buoyancy less than 1.0 shows revenue is growing slower than the economy. The averages back to 1970 and 1985 are 1.09 and 1.07 respec- vely, but the averages back to 1995 and 2000 are lower at 0.84 and 0.76 respec  vely (see Figure 1).3 The 41-year trend illustrates the downward slope of buoyancy. It is also worth no  ng that a more buoyant revenue system means that with downturns in the economy contrac  ons in rev-enue are larger. Thus buoyancy and stability may, at  mes, be two con-fl ic  ng goals for a revenue system.Revenue growth rates are aff ected by both changes in the revenue base and tax rates. Many states’ revenue February 2012No. 3The decline in general fund buoyancy is one reason for Kentucky’s budget problems. The growth of revenue is not keeping pace with growth in the economy, especially in the last decade.Gatton College of Business and EconomicsUniversity of Kentucky1.50.50.51.52.51970 1980 1990 2000 2010FIGURE 1Kentucky's General Fund Buoyancy, FY70 to FY10Annual FY70 FY10 (1.09)FY85 FY10 (1.07) FY95 FY10 (0.84)FY00 FY10 (0.76) 41 Year TrendSource: Authors' CalculationsTABLE 1Personal Income and General Fund Revenue Compound AnnualGrowth Rates (CAGR), US, Kentucky and Surrounding States,Long Term and Short Term CAGR RatiosCAGR 1979 to 1999 (21 years) CAGR 2000 to 2010 (11 years)PersonalIncomeGeneralFundCAGRRatioPersonalIncomeGeneralFundCAGRRatioUS 7.0% 6.8% 0.97 3.7% 2.5% 0.66IL 6.1% 5.7% 0.94 2.9% 0.8% 0.29IN 6.1% 7.5% 1.22 2.8% 2.9% 1.04KY 6.2% 6.7% 1.08 3.4% 2.4% 0.70MO 6.4% 6.9% 1.08 3.6% 0.6% 0.18OH 5.9% 7.8% 1.33 2.5% 2.2% 0.88TN 7.4% 5.0% 0.68 3.9% 3.6% 0.94VA 7.6% 6.9% 0.91 4.7% 2.6% 0.55WV 5.0% 4.9% 0.98 4.0% 3.6% 0.90Note: The CAGR ratio is the general fund CAGR divided by the personal income CAGR. A ratioover 1.0 indicates that general fund revenue is growing faster than personal income while aratio less than 1.0 means that the general fund is growing slower than personal income.Source: Author's analysis of data from the U.S. Bureau of Economic Analysis and the NationalAssociation of State Budget Officerssystems have failed to keep pace with over-all economic growth during the past decade due to one or both of these factors. Using the ra  o between the compound annual growth rates (CAGR) of the general fund and personal income, we compare Kentucky to the U.S. and surrounding states during two  me periods—1979 to 1999 and 2000 to 2010.4 Just like the average buoyancy, a ra- o of 1.0 indicates that the general fund is growing at the same rate as the economy. As shown in Table 1, Kentucky’s CAGR ra  o is 1.08 during the earlier period. Tennes-see, with a CAGR ra  o of 0.68, is the only surrounding state with a CAGR ra  o signifi -cantly below 1.0. However, in the more re-cent era, from 2000 to 2010, four states are well below 1.0—Illinois (0.29), Kentucky (0.70), Missouri (-0.18), and Virginia (0.55).Figure 2 shows that two sources of revenue—the individual income tax and the sales and use tax—account for nearly three-quarters of Kentucky general fund revenue.5 Regardless of whether we assess the adequacy of the revenue structure by comparing average buoyancy or the CAGR ra  o, Kentucky’s main revenue sources are grow-ing slower than its economy (see Table 2). For example, the compound average growth rate of the individual income tax from 2000 to 2010, the largest source of general fund revenue, was slightly less than half of the com-pound average growth rate of the overall economy—evidenced by a CAGR ra  o of 0.45. Likewise, the average buoyancy and CAGR ra  os for the sales and use tax have declined to about 0.70 during the last decade. Compared to the three earlier periods—FY70-FY79, FY80-FY90, and FY92-FY996—revenue in the last decade is not keeping pace with the economy.The decline in buoyancy will likely con  nue in the absence of fundamental tax reform. A mul  tude of systemic fac-tors aff ect these sources of revenue, including the gradual shi   in personal income away from taxable sources (e.g., wages, salaries, and proprietors’ income) and toward mostly nontaxable sources (e.g., some transfer payments and nontaxable employee benefi ts); the transi  on from a goods-producing economy that is taxed to a service-pro-viding economy that is largely untaxed; the rise of “mail order” or remote retail sales, which includes Internet and catalog purchases; an aging popula  on whose spending pa  erns generate less rev-enue compared to younger cohorts; and the prevalence of tax exemp  ons. While not the only factor caus-ing Kentucky’s recurring budgetary problems, fi xing the decline in general fund buoyancy will go a long way toward solving Kentucky’s structural defi cit.                                                                                                         ISSUE BRIEFFebruary 2012No. 3Since 2000, Kentucky’s general fund is growing slower rela  ve to its economy compared to many surrounding states. The individual income tax and the sales and use tax account for most of Kentucky’s gen-eral fund revenue.A mul  tude of factors are aff ect-ing the decline in Kentucky’s general fund buoyancy.NotesCenter for Business and Economic ResearchGATTON cOLLEGE OF bUSINESS AND eCONOMICSUNIVERSITY OF kENTUCKY1General fund buoyancy and elas  city are related concepts. Both are defi ned 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 calcula  ng elas  city to refl ect any changes to the tax code that aff ect rates or the base.2Refer to Tax Expenditure Analysis, Governor’s Offi  ce of the State Budget Director, Commonwealth of Kentucky, various years, and “The Im-petus for Tax Moderniza  on: Economic, Demographic, and Poli  cal Change,” Financing State and Local Government: Future Challenges and Opportuni  es, ed. David Wildasin, et al. (Kentucky Long-Term Policy Research Center, 2001): 103-121.3The data are from the Kentucky OSBD, Kentucky Revenue Cabinet and the U.S. Bureau of Economic Analysis.4The data used to calculate the compound annual growth rate for the general fund are from “The Fiscal Survey of States,” Na  onal Associa  on of State Budget Offi  cers, Fall, various years, available at <h  p://www.nasbo.org>.5Kentucky Revenue Cabinet, Annual Report 2010-2011, 1 Dec. 2011, 3 January 2012 <h  p://revenue.ky.gov/>.6We exclude FY91 because there were signifi cant changes made to the tax code in FY90 that skew the data for FY91.0%10%20%30%40%50%1970 1980 1990 2000 2010FIGURE 2Kentucky's General Fund Receipts by MajorSources, FY70 to FY10Property Tax Sales & Use TaxIndividual Income Tax Corporate Income TaxCoal Tax OtherSource: Authors' Calculations based on data from the Kentucky Finance andAdministration Cabinet and the Kentucky Revenue CabinetTABLE 2Kentucky General Fund, Individual Income Tax, & Sales and Use Tax,Average Buoyancy and Compound Annual Growth Rate (CAGR) RatiosGeneral Fund Individual Income Tax Sales and Use TaxAverageBuoyancyCAGRRatioAverageBuoyancyCAGRRatioAverageBuoyancyCAGRRatioFY70 FY79 1.20 1.19 1.39 1.36 0.84 0.80FY80 FY90 1.25 1.07 1.55 1.37 1.12 0.90FY92 FY99 0.97 1.01 1.19 1.24 1.23 1.19FY00 FY10 0.76 0.70 0.78 0.45 0.65 0.74Note: The average buoyancy is calculated by dividing the annual percentage change in general fund, individualincome tax, or sales and use tax by the annual percentage change in personal income.Source: Authors’ analysis of data from the U.S. Bureau of Economic Analysis, Kentucky Finance and AdministrationCabinet and the Kentucky Revenue Cabinet

The Long-Term Decline in Kentucky’s General Fund Buoyancy

https://uknowledge.uky.edu/cgi/viewcontent.cgi?article=1004&amp;context=cber_issuebriefs

The Long-Term Decline in Kentucky’s General Fund Buoyancy

Abstract

Similar works

Full text

Available Versions

University of Kentucky