Recently in Kentucky Category

Who should pay to fix the billion dollar hole in Kentucky's budget? One group of lawmakers thinks low- and middle-income families, the same families hit hardest by the economic crisis, should foot the bill. Another group of lawmakers thinks that well-off families, the same families who have benefited the most from the tax-cutting sprees and the economic changes of the last several years, can afford to give something back. A new report from ITEP shows how different the two approaches are.

Both views were on display yesterday during a meeting of the Interim Joint Committee on Appropriations, where lawmakers discussed these two very different alternatives for solving the state's anticipated shortfall for the next fiscal year, now estimated to total $996 million.

HB 51 PHS would repeal Kentucky's personal and corporate income taxes as well as its limited liability entity tax, reduce the sales tax rate from 6.0 to 5.5 percent, and broaden the sales tax base to include a variety of services. Estimates show that in future years this legislation would actually cost the state money and make Kentucky's tax structure more regressive.

The other bill heard on Thursday, HB 223, would raise tax rates for well-to-do Kentuckians, create a new income tax credit based on the federal Earned Income Tax Credit (EITC), reinstate a version of Kentucky's estate tax, and also subject a variety of services to the sales tax. HB 223 would both increase state revenues and make the state's tax structure more progressive.

For more on these proposals, read ITEP's report, Tax Reform in Kentucky: Serious Problems, Stark Choices.

Like many state tax systems, Kentucky's currently faces two serious problems. The first -- and most immediate -- is that Kentucky's tax system is insufficient. It fails to produce enough revenue to fund the public services on which Kentuckians rely. The second problem, while less pressing, is arguably more persistent. Kentucky's tax system has long been inequitable, requiring low- and moderate-income residents to pay more in taxes relative to their incomes than wealthier individuals and families. In fact, in 2007, state and local taxes as a share of income were nearly twice as high for middle-class Kentucky taxpayers as they were for the most affluent.

Ideally, lawmakers would see this situation as an opportunity. Hearings like those conducted yesterday are steps in the right direction. However, it appears that Governor Beshear is turning his head away from discussions of comprehensive tax reform. When the special session scheduled to start June 15 begins, comprehensive tax reform isn't likely to be on the table. Instead, gambling, budget cuts, and federal stimulus dollars are likely to be on the legislative agenda. Precisely because Kentucky is facing such challenges, now is the time to reform the state's tax structure. HB 223 would certainly be a leap in the right direction.

Today a panel of economic experts is expected to unveil their estimate of Kentucky's budget shortfall for the next fiscal year. Governor Steve Beshear and administration officials seem to agree that the shortfall for the fiscal year starting July 1 could be about $1 billion. For context, the state's budget in the coming fiscal year is $9.3 billion, so it's clear that, unless revenue is raised, a significant portion of the state's programs and services will be on the chopping block.

Instead of accepting spending cuts as the only option for dealing with the coming shortfall, this week "Kentucky Forward" was launched. This coalition of labor, social service, community, and religious organizations, united behind a set of progressive tax policy principles, called upon the Governor to call a special session and put progressive tax reform on the legislative agenda. ITEP's comments during the coalition's launch about the need for tax reform can be found here.

Stay tuned. Next week a special joint meeting of the House and Senate budget committees will hear two tax reform bills. One is largely modeled after the so called "fair tax" and would eliminate the state's income tax and replace the revenue with new sales taxes. The other is a comprehensive tax reform bill that would make the Commonwealth's income tax more progressive as well as broaden the sales tax base to include more services.

It's safe to assume that there will be a special legislative session in Kentucky this summer. After all, the Blue Grass state is expected to face a billion dollar shortfall for the fiscal year starting July 1. Governor Beshear claims

he hasn't committed to calling back the legislature or decided what topic he would even select for a special session, but everyone knows a shortfall this large isn't going away without further action. So a flurry of proposals are being discussed from progressive income tax reform to increased gambling and even the so-called "fair tax."

The infamous "fair tax" legislation, which proponents are pushing all over the country, would eliminate corporate and individual income taxes, replace the lost revenue with increased sales taxes on a wide range of services, and eliminate most current sales tax exemptions. Before going too far down this path,

Kentucky legislators should take a moment to look at how that same proposal has faired in other states just this year.

Missouri, "fair tax" legislation passed the House of Representatives but went nowhere in the Senate. An ITEP analysis found that this proposal would raise taxes on middle-income Missourians and require a much higher sales tax rate than advertised.

A similar fate is expected in South Carolina where similar legislation has been introduced in the House. Advocates in South Carolina are hopeful that the legislation won't get very far.

Kentucky lawmakers should quickly jump off the failed "fair tax" bandwagon and instead look for ways to improve their state's tax structure while also increasing state revenue.

This week, Kentucky's legislative session ended without much in the way of progressive tax reform actually becoming law. Instead, policymakers voted during the 30-day session to approve a cigarette tax hike and remove the sales tax exemption on beer and liquor. But there is some hope that the session laid productive ground work for tax reform efforts next year. According to the Lexington Herald-Leader, tax overhaul discussions are on the horizon. At the moment, the choice seems to be between a bill that would eliminate the state's corporate and personal income taxes or a different bill that would introduce a state earned income tax credit (EITC), broaden the sales tax base to include services, and add new top income tax brackets. Legislators and policymakers interested in tax fairness should stay focused on passing a bill that includes an EITC and sales tax base expansion.

Following the creation of a federal tax credit for new home buyers, two states are considering also wandering down this unproven and expensive path. North Dakota and Kentucky are each debating sacrificing taxpayer dollars to fund special tax breaks for newly built homes. In Kentucky, the break would come in the form of a $5,000 tax credit for purchasers of newly constructed homes, while in North Dakota, those fortunate enough to afford a newly built home during this downturn would enjoy a temporary doubling of their property tax homestead exemption (from $75,000 to $150,000).

In each case, the break would not be available for purchasers of older residences, suggesting that these breaks are more of a bailout for developers than they are aid for those in the market to buy a home. And in either case, the proposals still suffer from many of the flaws with the federal break -- such as their potential to re-inflate home prices, and the fact that these breaks won't provide homebuyers with any cash at the time of purchase.

It's hard to believe, but there may actually be a trend in state tax policy more prominent than increasing cigarette taxes. Business tax credits aimed at spurring economic development have been among the most popular ideas in statehouses scrambling for ways to reduce unemployment. Just last week, we described a plan in Minnesota to boost investment tax credits and a budget in California containing a few credits of its own. This week, proposals to do the same in Iowa, Kentucky, and Missouri are under discussion.

In Iowa, Republican lawmakers have suggested paying (via tax credit) half the salary of each new job created by private businesses. Oddly, because this payment would be administered through the tax code rather than as a direct grant, the debate has become confused to the extent that this policy has been labeled as a way to return to a "market-based, capitalistic system".

An excellent op-ed out of Kentucky helps clear things up a bit, noting that Gov. Beshear's proposed expansion of business tax incentives would be a costly, nontransparent, and likely ineffective way of encouraging job growth. The op-ed goes on to argue that a "broader" approach, including better targeted and more closely scrutinized spending programs, could do far more good than creating more tax credits.

Finally, as an expansion in economic development tax credits works its way through Missouri's legislature, the admission of at least one legislator that he is a "recovering tax credit addict" helped to shine some light on the unfortunate politics behind these types of tax credits. These programs can cost a state enormously, and are rarely defensible on principled tax policy grounds. Instead, they constitute a type of spending done through the tax code -- commonly referred to as "tax expenditures" -- which add complexity, shrink the tax base, require higher marginal rates, and offer little if anything in terms of making the system more responsive to individuals' and businesses' ability to pay.

Last week Missouri lawmakers joined Tax Justice for a Healthy Missouri and the newly formed Long Spoons Coalition to hold a press conference promoting HB 567, a bill that would modernize Missouri's outdated income tax structure (the top $9,000 bracket hasn't changed since 1931) and produce needed revenue while cutting taxes on average for the bottom 60% of Missourians. It's fine time that this sweeping legislation receives attention from policymakers and the press.

A progressive tax reform proposal is also in the news in Kentucky, where some lawmakers want to balance their state budget in a progressive way, combining revenue-raising options with tax cuts for low- and middle-income folks. The Kentucky reform plan includes an Earned Income Tax Credit, new top rates and brackets, and broadening the sales tax base. The bill's sponsor will be meeting with Kentucky Governor Steve Beshear about the bill's merits -- a meeting we hope goes well.

By now you're familiar with the basic outline of the story. Our broader economic troubles have translated directly into state budgetary nightmares, and in most cases, the natural inclination of policymakers has been toward slashing services. As a recent op-ed from the Kentucky Youth Advocates points out, however, "making up the shortfall with nothing more than cuts in spending will cause serious, and in some cases permanent, harm to [any state's] residents and infrastructure".

In addition to the Kentucky governor's proposals to tap the rainy day fund and increase the state's abnormally low cigarette tax rate, the op-ed goes on to suggest:

• "Adding a 1 percent surtax on incomes of $500,000 or more... [or, alternatively], adding a 1 percent surtax on the richest 1 percent of taxpayers in Kentucky."
• "Kentucky also can follow the example of some 20 other states and close corporate tax loopholes so that multi-state corporations operating in Kentucky can no longer avoid paying state taxes by setting up subsidiaries in other states."
• "If the Commonwealth makes its own tax law, instead of blindly following federal law, we can "decouple" some of our tax policies from the federal tax code, especially in taxing domestic production. That alone would produce an additional $30 million dollars in 2010."
• "Finally we can broaden the tax base by enacting an equitable way of taxing services to provide sustainable revenue, particularly during economic slowdowns when the manufacturing sector slows."

Echoing a concern that should be on the minds of many states, the op-ed points out that absent changes in the way the state raises revenue, "the state will still face cuts in 2009, shortfalls in fiscal year 2010 and continuing problems in the years to follow. Even before the recession, Kentucky's annual revenues were not adequate to meet its annual expenses, and Frankfort balanced the budget by using gimmicks". Click here to read the full op-ed, or here to visit the Kentucky Youth Advocates' website.

The Blue Grass state is facing its own budget crisis. The latest estimates put the state's shortfall at $456 million. In an admittedly symbolic gesture, Kentucky Governor Steve Beshear and six other high ranking state officials have agreed to a 10 percent pay reduction. Latest reports are that all options, including resurrecting a failed attempt to raise cigarette taxes and cutting services drastically, are on the table. Raising cigarette taxes certainly isn't an ideal revenue raiser because of its regressive nature and declining yield, but it's good to see that the Governor is not focusing only on cutting public services.

Advocates in Kentucky have long been pushing for the implementation of a state Earned Income Tax Credit (EITC). The EITC is a popular, targeted tax credit that offers assistance to working families. Similar credits have been enacted in 22 states and the District of Columbia. The House Budget Committee passed a bill that would introduce a credit equal to 7.5 percent of the federal EITC, coupled with a broader state estate tax. The bill will now go before the full House.

Policymakers in Connecticut have revived their efforts - stymied by a veto by Governor Jodi Rell - to enact a refundable EITC equal to 20 percent of the federal credit. A bill creating such a credit was approved by the General Assembly's Human Services Committee in late February; see this recent testimony from Connecticut Voices for Children on the measure's potential impact.

The state of Washington, despite lacking a personal income tax, could also be moving towards adopting a version of the EITC. Called the Working Families Credit, it would provide as many as 350,000 Washington residents with a credit amounting to 10 percent of their federal EITC, thus offsetting some of the impact of Washington's highly regressive tax system.

In more low income tax relief news, the Idaho House Revenue and Taxation Committee voted this week to increase the state rebates offered to offset the state's sales tax on groceries. Currently Idaho residents receive a $20 credit as an offset to the sales tax on groceries (more for seniors). The proposal being debated in the House would provide increased and targeted tax relief. For example, the new expanded credit would offer $50 per family member if the family's income is less than $25,000. The value of the rebates would increase each year until the maximum credit of $100 is reached. By 2015 the proposal is expected to cost about $122 million. Read more about options states have to provide targeted tax relief in ITEP's policy brief.

Kentucky

Kentucky residents are bracing themselves for a fiscal crisis but newly elected Governor Steve Beshear's State of the Commonwealth speech offered little more than spending cuts and grim predictions for how to handle the quandary. One of the reasons cited for the budget shortfall was "weaker-than-expected corporate income tax returns." Oddly, in his speech the Governor chose to ignore revenue raising options that would help to ensure Kentucky's fiscal solvency into the future.

Advocates of tax breaks for business typically argue that such tax breaks will benefit workers as companies are more able to expand and invest. The latest study to call this into question comes from the University of Kentucky, which finds that tax breaks don't create as many jobs as previously hoped. The report concludes, "Based on our evidence showing that training incentives are positively related to economic activity in an area, and given that relatively little is spent on this program, the Legislature may want to consider increasing the amount spent on training incentives" rather than more tax breaks.

It's also doubtful that tax breaks are very important to the success of businesses themselves. Despite the fact that Kansas business owners named excessive taxation as their biggest concern for the fourth year in a row, nearly half of the businesses surveyed by the Kansas Chamber of Commerce weren't even aware that the Legislature had enacted a six-year, $632 million business tax cut last year. The bill eliminated the state's property tax on new capital investment in business equipment and machinery and went into effect last July. It's difficult to believe that tax breaks could be vital to economic expansion if they're not even noticed by the corporations that benefit most from them.

If some Kentucky legislators have their way, the Alternative Minimum Calculation (AMC), which is the state's alternative minimum tax paid by businesses, may be on its way out. According to the Louisville Courier Journal, the state has numerous unmet needs and faces a structural deficit, yet some legislators would rather spend the temporary budget surplus on permanent tax cuts for businesses. Earlier this year, the state held a special session where aspects of the AMC were amended to help small businesses. As a result, those with less than $3 million in gross profits are now exempt from the tax and those with gross profits of less than $6 million enjoy a reduced tax rate. But apparently that's not enough for some legislators and business people. Concerning the repeal, Tom Underwood, state director of the National Federation of Independent Business says, "It's not going to hurt anybody's feelings if it is repealed altogether." Maybe he meant anybody except the Kentuckians who will have a harder time paying for schools and and healthcare if the tax is eliminated.

As we reported in last week's digest, elected officials are doing all they can to wiggle around and out of their "no new tax" pledges. This week we have a similar story from Kentucky, where Governor Ernie Fletcher explains his support for a 25 cent tax on cigarette papers by calling it "closing a loophole" rather than an actual tax hike. Even the House Speaker seems confused, claiming that this proposal is "not a tax increase, it's tax equity." For a heavy hitting editorial from the Courier-Journal about this attempt to raise taxes, but stay away from the "T" word, click here.