Steve Beshear: Plan gives Ky. updated tax code that allows it to compete

February 6, 2014 

Stu Silberman said a cut in early education will be a blow to the state's economy, too

With aggressive efforts to modernize our health-care delivery system, our P-12 education system and our presence in the global economy, Kentucky is becoming more vibrant, competitive and stronger.

But a fundamental weakness holds us back: an archaic tax system designed for a 20th century economy. Recently I unveiled "Kentucky Competes," a proposal to modernize our tax structure with 22 specific changes designed to:

■ Lower tax rates for individuals and businesses.

■ Expand our tax base.

■ Protect Kentucky's signature industries.

■ Adapt to new technology, the changing marketplace and demographic trends.

■ Bring Kentucky's taxes in line with surrounding states.

■ Improve the health of our work force.

■ Create jobs by making Kentucky more attractive to businesses.

My proposal, available at www.governor.ky.gov, would:

■ Lower the individual income tax rate structure. Every Kentuckian will benefit from this change when it's coupled with the current Family Size Tax Credit, a new state Earned Income Tax Credit and a new "hold-harmless" credit.

■ Lower the top corporate tax rate from 6 percent to 5.9 percent and phase in "single-factor apportionment" for businesses that operate in multiple states.

Currently, corporate income is based on a three-factor formula of sales, property and payroll. We would join almost 20 other states in switching to a formula based solely on sales — lessening the burden for multi-state companies with significant payroll or property in Kentucky.

This will encourage businesses like large manufacturers and companies headquartered in Kentucky to expand and other companies to locate here.

■ Create various tax credits to encourage investment in small businesses and high-tech research.

■ Make changes that help signature Kentucky industries like bourbon, equine and food animals.

■ Create a healthier work force by raising the tax on cigarettes and other tobacco, including e-cigarettes.

■ Broaden the sales tax to include selected services, acknowledging a fundamental and ongoing transition — from a goods-based economy to a service-based economy — that has been seriously eroding our tax base.

In 1960, consumer spending on goods represented 53.4 percent of personal expenditures. By 2012, that number was only 33.8 percent. Conversely, in 1960, consumer spending on services represented 46.6 percent of personal expenditures. By 2012, it had increased to 66.2 percent.

My plan brings Kentucky closer to neighboring states in how we tax retirement income for those with high earnings, while still giving those taxpayers more favorable treatment than in those other states.

This change does not affect adjusted gross incomes of less than $80,000 a year, so elderly people with fixed incomes are not affected by this proposal. In fact, this change will affect only about 90,000 of the 1.8 million tax filers in Kentucky.

I also support putting a constitutional amendment on the ballot that would allow communities to vote on a local sales tax for specific projects they may need, although this will be separate legislation.

Now, although new revenue isn't the primary goal of tax reform, my plan does result in initial additional revenue of approximately $210 million, a modest amount that is just over 2 percent of current official revenue estimates.

That amount also roughly matches our budget's current structural imbalance, meaning that state government would again be living within its means.

In the long term, because we will finally have a 21st century tax code tied to a 21st century economy, additional revenue will be generated as the economy grows. That's the silver lining.

Nobody who has been paying attention should be surprised by these proposals.

They are based on recommendations made by my 2012 Blue Ribbon Commission on Tax Reform chaired by Lt. Gov. Jerry Abramson. Many were also featured in 12 previous studies of our tax code since 1982. Furthermore, most of these ideas were discussed in detail with legislative leaders during the negotiations over the unfunded public pension liability in the 2013 session.

Rep. Rick Rand, chairman of the House Appropriations and Revenue Committee, agreed to introduce this legislation in order to begin the discussion, and his committee will hold hearings to receive input from the public.

However, I am well aware that a proposal to amend our tax code is politically sensitive, especially during an election year, and that what needs to be a serious discussion regarding tax reform could easily be turned into a political football in those elections.

I am determined to avoid that possibility. So I will not ask either chamber to vote on any bill containing these proposals or any version thereof unless a consensus has been reached by a majority of both chambers which will assure the bill's passage.

This process proved successful during the 2013 pension negotiations, and I believe it is the only approach which offers any opportunity for success with tax reform.

Steve Beshear is governor of Kentucky.

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