Kenneth Biller said that he thought it was a pity Kes left because there were so many possibilities for her given her unique lifespan and abilities, so I don't believe the writers couldn't come up with story ideas for her.
As for them not knowing which direction to go with the character....they didn't know which direction to go with hardly any of the characters! What "direction" did Chakotay, Harry, Neelix or Tuvok go in exactly from season 4.....except into the background. And even Janeway, while getting a lot of screentime, didn't seem to be getting much direction. I just think Taylor didn't like the character of Kes and decided to get rid of her, it was easier to write lines of dialogue for characters like Chakotay and Harry because they could be given filler lines or technobabble lines each episode. Kes actually had to be given her own stories or worked into other stories and that obviously required more effort. I don't think it was a question of "can't", simply "can't be bothered".