Gov. Steve Beshear announced in his State of the Commonwealth address that he will propose a specific tax reform plan to the General Assembly in the coming weeks. His leadership is welcome and is essential to building support for such an important issue.
The big question now concerns the specifics of a plan because in tax reform the details make all the difference. Changes to the tax code can make our state and economy better or worse, depending on the goals and particulars of a proposal.
To move Kentucky forward, a tax package must be built on three core principles.
First, tax reform should raise significant new revenue now to begin reinvesting in Kentucky's needs.
The state has cut $1.6 billion over the last six years from schools, health and other vital services that support people, communities and our economy. These cuts have resulted in outdated textbooks, shuttered child care centers and tuition hikes at colleges and universities. Lack of revenue is undermining the foundation of economic growth and forestalling needed investments in early childhood education and other areas that we know pay off in the long run.
Also, Kentucky's resource woes aren't just because of the recession. The state's revenues have been shrinking as a share of the economy since the early 1990s.
We've had tax reform that is revenue-neutral in Kentucky before and the resulting lack of new dollars is a big reason we're still debating the issue today. A tax package must raise new revenue to put Kentucky's finances and economy on a stronger footing. The Governor's Blue Ribbon Commission on Tax Reform, on which I served, proposed raising $659 million more for Kentucky's needs.
Second, tax reform should increase tax fairness based on people's ability to pay and not be a tax shift.
Currently, low- and middle-income people pay nine to 11 percent of their incomes in state and local taxes in Kentucky while the highest-earning one percent of people pay only six percent, as reported by the Institute on Taxation and Economic Policy. Any plan should improve and not worsen tax fairness.
But reform plans that make a shift in the overall tax system away from income taxes toward sales taxes make that problem worse. They raise taxes for the middle-class and low-income people while giving a tax cut to the richest Kentuckians.
A much better solution is to broaden the base of both taxes in a progressive way. The blue ribbon commission plan raises most of its new revenue from limiting deductions and exclusions for higher-income people in the income tax and extending the sales tax to some services. And it increases fairness by creating a refundable earned income tax credit for working families.
The governor and legislature also shouldn't include giveaways to big corporations in a tax plan. Kentucky's business taxes are already low compared to most other states. We won't gain from reducing those taxes further — especially since doing so would come at the expense of revenue needed for investment in education and other areas that make our economy and businesses stronger.
Third, tax reform should help Kentucky sustain its budget in the future by strengthening long-term revenue growth.
That means updating taxes to better align them to the modern economy, like including services in the sales tax. It also means addressing impediments like the law that arbitrarily drives down the state's property tax rate.
Reform also must secure and strengthen the role of the individual income tax as the cornerstone of the state tax system. It's the tax in our portfolio most able to keep up with the cost of public services over time. The individual income tax has generated 89 percent of net General Fund revenue growth since 2007. If it had been cut prior to the recession, our schools, health care services and other important investments would have suffered from even more devastating cuts.
Tax reform is necessary for progress on almost any of the state's priorities, and it's time for the General Assembly to grapple with this issue. But for Kentucky to advance, the specifics of a tax reform proposal must uphold and not violate the principles of adequacy, fairness and long-term sustainability.
Reach Jason Bailey at email@example.com.
Jason Bailey is director of the Kentucky Center for Economic Policy in Berea.