Kentucky ends 2014 fiscal year with $90 million shortfall; income tax collections remain flat

Kentuckians are buying more stuff, they just aren't paying as much in taxes.

That's why the state ended the 2014 fiscal year on June 30 with a $90 million shortfall in its general fund.

Sales taxes - the extra 6 percent consumers pay on their purchases - were up $109 million, the largest increase of any state funding source.

But the state's largest revenue source - individual income taxes - grew less than 1 percent compared to last year - about $63 million less than officials had planned. Even during the depths of the recession the past three years, Kentucky's income tax collections grew by 8.3 percent, 2.8 percent and 6 percent, respectively.

"The sales tax was our hero," State Budget Director Jane Driskell said. "The largest culprit was the individual income tax."

The reason, Driskell said, is what budget wonks refer to as the "April Surprise." In 2012, when the nation was barreling toward the fiscal cliff - the combination of automatic tax increases and spending cuts that had economists worried - most of the country's wealthiest individuals sold a lot of their assets to avoid a federal tax increase.

The result was in April 2013 - when most people file their state tax returns - states saw big jumps in individual income tax collections. Kentucky's income tax collections rose 5.6 percent in April 2013, or $21.9 million. But in April 2014, it meant the wealthy paid less taxes. Kentucky's individual income tax collections fell 8.7 percent in April 2014, or $36.7 million.

"We took some of that in consideration as other states did, but it seemed to be more significant than we originally thought," Driskell said.

And it has affected states across the country, according to Scott Pattison, executive director of the National Association of State Budget Officers.

"You usually have a fairly high percentage of income tax paid by the wealthiest individuals living in the state," Pattison said. "But we think we've worked through that cycle. The fiscal cliff impact is kind of done. As we move forward it will stabilize."

Kentucky's road fund was also short about $22.2 million. The state made more money from the gas tax because the tax automatically increased as the wholesale price increased. But it was not enough to offset the fact that people are buying less fuel.

It's unclear how the shortfall will affect road projects. The state has already delayed $185 million worth of federal construction projects - including the widening of a dangerous section of I-65 near Elizabethtown - because of a looming deficit in the federal Highway Trust Fund.

Democratic Gov. Steve Beshear has not said how he plans to make up for the shortfalls. While state officials know how much money the state collected during the last fiscal year, they still don't know how much the state spent. Driskell said officials should know that later this month.