In his public speeches, Gov. Matt Bevin has frequently stressed his desire to modernize Kentucky’s tax code. In a prepared video statement to a Kentucky Chamber of Commerce gathering Thursday, that vision became a little clearer.
Bevin said he hopes to make Kentucky’s tax code more business friendly by phasing out the individual income tax and eliminating the inventory tax, inheritance tax, and corporate income tax.
“If we want to produce, manufacture, engineer, design and send to the world 21st-century products, why would we disincentivize those who might do this by having an antiquated approach to taxation, where we tax production and not consumption?” said Bevin, who appeared via video because of a last minute trip to Washington D.C.
Kentucky is facing a potential budget deficit of $200 million this fiscal year and a pension crisis that could require as much as $2.5 billion a year to fix, leaving lawmakers scrambling for revenue. Often, that leads them to discussions about tax reform.
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Republican leaders in Frankfort have said they are philosophically opposed to tax reform that raises revenue by increasing taxes. Instead, they subscribe to a controversial economic theory that says cutting taxes on businesses will create more jobs and raise overall revenue.
Most economists, though, agree that such plans do not raise revenue in the short term.
Bevin’s talk mostly revolved around cutting taxes, which he acknowledged is difficult when state and local governments are struggling with budget deficits.
For example, Kentucky’s inventory tax, which Bevin would like to eliminate, generates about $150 million a year, according to the Kentucky Center for Economic Policy. Only about $13 million of that goes to the state, with the rest going to local governments.
“These are dollars that they don’t have the ability to easily replace,” Bevin said. “So we can’t just say ‘Hey, it would be good for Kentucky, let’s get rid of it,’ and not be mindful of the impact it has all the way down the line.”
Bevin pointed out at least one way the state could generate additional revenue — eliminating loopholes from the tax code.
Speaking to a room of business leaders, some of whom benefit from the loopholes he criticized, Bevin stressed the need to eliminate some of the tax giveaways, commonly called tax expenditures, that cost the state an estimated $13 billion in revenue each year.
“If we simply aligned our tax expenditures as closely as possible to the federal tax code we would immediately have a tremendous amount of additional income,” Bevin said.
That additional income would help balance the tax cuts Bevin promised as a candidate, such as eliminating the inheritance tax, which he calls the “death tax.”
The legislature has already exempted many people, such as immediate family members, from paying the inheritance tax, but it still raised around $44.6 million in the fiscal year that ended June 30.
“We should not be driving the wealth producers and the savers and the accumulators of the very seed capital that we need, to move to a different state,” Bevin said. “Bad idea. We’ve got to do better on this front.”
Bevin also stressed his desire to eliminate the income tax, both on corporations and individuals, but said he didn’t think it could be done all at once.
“I also, in looking at this, realize that there has to be gradations,” Bevin said. “Things have to move slowly over time. Not slowly to the point that no real progress is being made, but I would like to see income taxes for example, start to not have a six in front, but a five and a four and a three and to move on down to the point where we don’t have a state income tax.”
That’s not a new idea. Other states, such as Missouri, have experimented with using revenue thresholds to slow tax cuts. When the state collects a certain amount of revenue, a tax cut automatically takes effect.
Any changes to Kentucky’s tax code are unlikely to happen soon, despite Bevin’s pledge earlier this year to call lawmakers into a special session to deal with the issue.
House Speaker Jeff Hoover, R-Jamestown, said Thursday he is forming a work group of seven lawmakers to look at tax reform, but said he doesn’t expect lawmakers to consider the topic until after next year’s legislative session.
“We’ve had no tax reform discussion this summer or fall,” Hoover said. “It’s all been pensions.”