By Rep. Jim Wayne, Rep. Tom Burch, Rep. Attica Scott, Rep. Kelly Flood, Rep. Reginald Meeks, Rep. George Brown Jr., Rep. Mary Lou Marzian and Rep. Joni Jenkins
We applaud Gov. Matt Bevin for seeking input on how to overhaul Kentucky’s tax code and ensure our obligations to public workers and retirees are met. There is really no question Kentucky needs to clean up its tax code so we can generate more revenue to pay those liabilities and better afford the public investments that benefit us all.
There is a sensible way forward on tax reform based on facts like this: Kentucky’s richest, who earn an average $839,500 per year, pay just 6 percent of their income in state and local taxes while the poorest, who earn an average of $9,100, pay 9 percent of their income.
Kentucky’s tax code is upside-down. Low and middle-income Kentuckians pay more of their income in taxes than high-income Kentuckians and corporations that take advantage of loopholes. It has become more so over time, reflecting not only rising income inequality but also tax and budget choices, such as expanding special interest tax breaks and cuts to programs that serve everyone.
Asking those at the top to chip in a little more will make the system fairer, while also bringing in much needed revenue for investments in quality public schools, affordable college and strong communities.
Over the last 25 years Kentucky has had a variety of well-intentioned attempts at tax reform, including the convening of study groups and the consultation of scholars. The last of these endeavors was Kentucky’s 2012 Blue Ribbon Commission on Tax Reform. Now is the time to use the wisdom of all these groups to establish a system that is adequate for our investment needs, flexible as the economy changes and fair to all of our citizens. We have prefiled our own comprehensive tax reform bill, known as BR 15, that does just that.
On the individual income tax side of things, that legislation would limit tax breaks currently used by higher-income people by capping itemized deductions at $17,500 annually, phasing out the pension income exclusion and creating a new higher top tax rate coupled with a reduction of rates for brackets under $75,000. It would also reinstate the estate tax, which only applies to very few, very wealthy individuals. These changes would bring in around $445 million annually. They are not radical; many of the states neighboring Kentucky already have similar provisions in their tax codes.
On the corporate tax side, the legislation would ensure more successful businesses pay the limited liability entity tax, tighten loopholes that allow profitable corporations to avoid taxation and eliminate corporate tax incentives that don’t promote economic growth. This legislation would rein in tax dodging and increase corporate tax revenue by about $88 million annually.
If we are serious about reforming the tax code and rebuilding the middle class, we have got to demand that the largest and most profitable corporations pay their fair share in taxes. They benefit from the investments we all make in our infrastructure and workforce that help businesses prosper.
The legislation would also expand the sales tax to include a number of luxury services such as limousine services and golf course and country club fees. We live in a service economy but Kentucky’s sales tax base includes very few services, and this would generate another $104 million.
One key component of the legislation is a state earned income tax credit (EITC) –an effective poverty-fighting tool that supports work and helps families afford basic living expenses, pay off debt and invest in education. Most states already have their own version of the successful federal EITC.
And among other things, the legislation would raise Kentucky’s tax on cigarettes and other tobacco products, including e-cigarettes. This would initially generate about $155 million in revenue, but – more importantly – it would discourage tobacco use and reduce associated costs. Kentucky has one of the highest smoking rates and highest rates of lung cancer in the country.
In total, all of these changes would help make Kentucky’s tax system less upside-down than it is today. According to an analysis by the Institute on Taxation and Economic Policy, the bill would maintain or lower what the bottom 60 percent of Kentuckians pay in overall taxes, while asking more from those at the top – especially the richest 1 percent – all while helping generate substantial new revenue for crucial public investments.
On the other hand, “shifting to a consumption-based” tax system – giving those at the top additional income tax breaks and asking more of everyone else through the sales tax – will make our tax system even more regressive. We should be skeptical of promises that income tax cuts will improve our economy and refrain from joining the bandwagon of states that have eviscerated their budgets through this scheme.
Raising revenue equitably will help address our liabilities and allow us to better fund the building blocks of thriving communities – good schools, better health and modern infrastructure.