Herald-Leader Editorial

Ky. cities need local tax option; tax credit would aid working poor

Tax credit would aid working poor

November 21, 2012 

Growing the economy is the optimum way to raise revenue for the state, but Kentucky's antiquated constitution applies the brakes to powerful economic engines.

We're talking about Kentucky's cities, which are hives of economic activity but are at a competitive disadvantage because of their limited taxing options.

Kudos to the Governor's Blue Ribbon Commission on Tax Reform for endorsing more taxing authority for local governments.

The recommendation would require voter approval twice — statewide first on a constitutional amendment and later on a local option tax question.

Under the recommendation, local governments could enact, with voter approval, temporary sales tax increases to finance infrastructure and projects. The tax would sunset when the project was paid off.

Local officials would have to make a strong economic case to convince voters to raise taxes on themselves.

In Lexington, for example, Mayor Jim Gray would have to show that his vision for a reborn Rupp Arena district would generate good jobs, not just good architecture.

On the downside, the sales tax falls heaviest on lower-income people, the working poor, as Rep. Jim Wayne reminded the tax reform commission.

The commission's recommended increase in tobacco taxes also would weigh heaviest on lower-income Kentuckians.

We support higher tobacco taxes for public health and new local taxing options. But the ultimate test of any tax system is fairness. To balance higher taxes that would hit lower-income Kentuckians, the commission and legislature must also support creation of a generous state earned income tax credit.

President Ronald Reagan called the federal earned income tax credit "the best antipoverty, the best pro-family, the best job creation measure to come out of Congress."

Twenty-five states and the District of Columbia have supplemental EITCs. Kentucky should become the 26th.

The idea behind the EITC is that a family shouldn't be poor if a parent is working full-time. The credit enables eligible workers to reclaim all of the federal income tax that was withheld from their paychecks, plus a refund up to the amount of the credit if the credit is more than the tax liability.

The credit is available to families who have children and annual incomes below $36,900 to $50,300, depending on marital status and the number of dependent children.

About 400,000 Kentucky families receive the federal credit. States set their EITCs as a percentage of the federal credit ranging from 5 percent to 32 percent.

Setting Kentucky's credit at 15 percent of the federal credit would cost the state about $135 million, but that's money that would be returned directly to local economies as few low-income families would be able to sock it away in the stock market.

The tax reform commission has recommended a bevy of breaks to make Kentucky more business friendly. The state's low-wage workers deserve a break, too.

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