UK report: Kentucky should broaden its tax base to include services

lblackford@herald-leader.comFebruary 6, 2012 

A new report from the University of Kentucky says Kentucky's tax code should broaden its base to get a more stable system.

It's the latest in a long line of research that says Kentucky should align its tax code more with areas of economic growth.

The authors say the current structure lacks "buoyancy," a description of how well state revenue keeps pace with the economy. During the past 40 years, there's been a gradual decline in that rate.

Co-author William Hoyt, an economics professor and director of UK's Martin School, said the reason for the long-term gradual decline is that a smaller share of income is spent on tangible goods, which are taxed, and a larger share is spent on services, which are not.

The measure of buoyancy would be helped by matching the tax code to a more modern economy that taxes services, which encompass anything from dry cleaning and limousine rentals to legal services.

"The tax system that Kentucky has was created at a time long ago when we had a very different kind of economy," said co-author Michael Childress, a dean's assistant in the Center for Business and Economic Research at UK.

Broadening the tax base to include that sector of the economy would allow revenues to keep better pace with economic growth.

"Broadening the base could also make the system more stable," Hoyt said.

The issue of taxing services has been around at least 10 years in Kentucky, and is sure to get more discussion. Gov. Steve Beshear has announced the formation of a task force to study tax reform. Members of the commission are supposed to be announced next week, a spokesman for the governor's office said Monday.

Reach Linda B. Blackford at (859) 231-1359 or 1-800-950-6397, Ext. 1359.

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