Herald-Leader Editorial

Get it right, go big on tax reform

February 9, 2014 

Lawmakers have plenty of time to dig into tax reform and improve on what Gov. Steve Beshear has proposed.

While Beshear is offering some good ideas, his package does too little to broaden the state's loophole-ridden tax base while carving out even more loopholes.

Kentucky already exempts more in taxes than it collects. Sooner or later, lawmakers must, as House Speaker Greg Stumbo recently said, comb through the decades of tax breaks which, unlike state spending, are almost never revisited or analyzed for their economic benefits and costs.

"We've really incentivized our tax code to the point where we're giving away more money than we're taking in, and some of these things are 20 or 30 years old," Stumbo told the Herald-Leader. "They need to be looked at and reviewed again."

If the legislature dramatically broadened the tax base by closing enough loopholes, Kentucky probably could afford to make attention-grabbing reductions in tax rates.

Beshear is proposing to lower the corporate and top individual income tax rates — but only from 6 percent to 5.9 percent — costing the state $186.5 million.

Beshear also wants to give multistate companies a $154.5 million break, by changing a formula for calculating corporate taxes as 20-some states have done.

Beshear touts these reductions, along with a bevy of new tax credits for business, as enhancing Kentucky's competitiveness. He says the break for multistate companies would help attract more manufacturers and big companies.

But state corporate income taxes make up less than 0.3 percent of total business costs, according to the Institute on Taxation and Economic Policy, making any new competitive edge minor. Also, the change backed by Beshear would increase taxes for some smaller businesses and encourage more corporate tax avoidance. This proposal bears close scrutiny.

Beshear's main proposals for broadening the tax base are:

■ Applying the 6 percent sales tax to some services that could not easily move to other states, raising $279.9 million for the state.

■ Reducing or phasing out the retirement income exclusion for taxpayers whose annual gross income is over $80,000, raising $176.3 million.

Both of these changes make sense.

Beshear also wants to increase the cigarette tax from 60 cents to $1 a pack, raise other tobacco taxes and tax e-cigarettes, raising $124.5 million. This is great public policy and would lower Kentucky's health care costs, but it's not a long-term revenue solution because if it works Kentuckians' consumption of cigarettes and other deadly tobacco products will decline and so will the revenue.

Expanding the sales tax to more services would better align the tax code with a modern economy and with other states' tax codes. While low-income Kentuckians would be hurt most by a services tax, the effect would be offset, at least somewhat, in Beshear's plan by a new earned income tax credit, costing the state $73 million.

About 424,000 working Kentuckians would qualify for an average credit of $171.50. Beshear's tax-reform commission recommended an EITC of double what the governor is proposing.

His blue ribbon panel also recommended triple the $210 million in new revenue Beshear's plan would ultimately generate. Beshear's extra $210 million might ease short-term budgetary pain but it falls far short of filling the $1 billion structural deficit the state faces by 2020.

Last year, Beshear and lawmakers of both parties showed they can tackle complicated issues. This is the time to get tax reform right.

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