Now that they are in control, Gov. Matt Bevin and the Republican House and Senate majorities are vowing this year to finally reform Kentucky’s tax code, which has needed reform for many years.
The big question, though, is whether their plans will make things better or worse for most Kentuckians, especially poor and middle-class workers struggling to make ends meet.
Neither Bevin nor legislative leaders have revealed their exact plans, but their comments offer some clues. They favor lower taxes on business, which means the tax burden would be shifted to individuals. They also prefer sales and other consumption taxes to income taxes. But the result of that is wealthier people end up paying a smaller share of their income in taxes than do middle-class and poor people, who spend most of their income rather than save or invest it.
Republicans like to argue that lower business and income taxes encourage more economic growth, which leads to more jobs and future higher tax revenues. Trouble is, this “supply side” economic theory — what former President George H.W. Bush famously called “voodoo economics” — has never been proven to work.
Its biggest recent failure has been in Kansas, where Gov. Sam Brownback’s massive tax cuts in 2012 were supposed to unleash an economic boom. Instead, Kansas’ economy has stalled and huge deficits have triggered big cuts in schools and government services.
North Carolina tried a version of the Kansas plan in 2013. By some measures, the state’s economy has had strong growth since then. But a closer look shows most of that growth has been in two metro areas, Charlotte and Raleigh. Job growth has been weak in most of the rest of the state, and most people’s real wages have fallen. State and local governments have had too little money to invest in education and public services, much less cope with recent natural disasters such as Hurricane Matthew.
“I hope you will take my remarks as a cautionary tale,” Alexandra Sirota, director of the progressive North Carolina Budget and Tax Center, said Friday at the annual policy conference of the Kentucky Center for Economic Policy.
“Understand where these ideas come from and how they have not delivered in places where they have been tried,” Sirota said. “Tax cuts (for the wealthy) do not boost wages. They do not help working people.”
Berea-based KCEP, which is affiliated with the Mountain Association for Community Economic Development, produces accurate research reports that often run counter to the policy prescriptions legislators hear from business groups and wealthy special interests that spend millions of dollars lobbying them each year.
KCEP’s main recommendation for tax reform is the most obvious: review special-interest tax breaks and eliminate those that don’t boost the overall economy. Kentucky’s tax giveaways are totally out of control. State government now takes in $10 billion in tax revenues, but gives away $12 billion in tax breaks. Hello?
As legislators begin debating tax reform, KCEP staffer Pam Thomas, who previously spent many years with the state’s Legislative Research Commission, outlined some issues voters should think about as they hear the governor and legislators propose and debate tax-reform plans.
“Here’s where you start the conversation,” Thomas said. “What do communities need? What does government provide? What does it cost?”
Once those questions are answered, here are characteristics of a good tax system: It should be transparent, fair, equitable and based on taxpayers’ ability to pay. A good tax system is stable — meaning its revenue doesn’t fluctuate wildly with economic conditions — and is predictable for both taxpayers and government policymakers.
A good tax system doesn’t create inequities among similar kinds of taxpayers, such as incentives for new businesses that move into a state at the expense of businesses already here.
Kentucky’s 1891 constitution requires government expenses to be covered by tax revenues, but governors and lawmakers have been fudging the numbers since the 1990s because tax increases are unpopular. That has created many problems, most notably the public employee pension crisis that Bevin has had the courage to tackle.
Fixing the pension system should not be an excuse for shortchanging investments in education or vital infrastructure, but an argument for more revenue. Nobody likes paying higher taxes, but “revenue neutral” plans won’t ever fix Kentucky’s problems — only make them worse.
Two final thoughts: When taxes are cut for one group, they are usually being raised for everyone else. And when politicians promise that tax cuts will be offset by economic growth, remember how those promises have failed in other states.