Tax Justice Digest stories about Kentucky
The latter proposal isn't without it critics (after all, gambling is a notoriously regressive way to raise revenue). But proponents of the legislation are highly-organized. Wednesday hundreds of proponents of the legislation (including a two-time Kentucky Derby winning jockey) rallied in Frankfort in favor of increased gambling.
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
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
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,
In
A similar fate is expected in
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.
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.
