This commentary was signed by Democratic Reps. Jim Wayne, Tom Burch, Reginald Meeks, Joni Jenkins and Attica Scott of Louisville; Kelly Flood and George Brown Jr. of Lexington.
We applaud Gov. Matt Bevin for seeking input on how to overhaul Kentucky’s tax code and ensure our obligations to public workers and retirees are met. There is really no question Kentucky needs to clean up its tax code to generate more revenue to pay those liabilities and afford the public investments that benefit us all.
There is a sensible way forward on tax reform based on facts like this: Kentucky’s richest, who earn an average $839,500 per year, pay 6 percent of their income in state and local taxes while the poorest, earning on average $9,100, pay 9 percent.
Kentucky’s tax code is upside-down. Low- and middle-income Kentuckians pay more of their income in taxes than high-income residents and corporations that use loopholes. It has become more so over time, reflecting rising income inequality as well as tax and budget choices, such as expanding special-interest tax breaks and cuts to programs that serve everyone.
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Asking those at the top to chip in a little more will make the system fairer and create revenue for investments in quality public schools, affordable college and strong communities.
Over the last 25 years, Kentucky has had well-intentioned attempts at tax reform. The last was the 2012 Blue Ribbon Commission on Tax Reform. Now is the time to use that wisdom to establish a system adequate for our investment needs, flexible to accommodate a changing economy and fair to all. We have prefiled a comprehensive tax reform bill, known as BR 15, that does just that.
Our bill limits tax breaks used by higher-income people by capping itemized deductions at $17,500 annually, phases out the pension-income exclusion and creates a new tax rate at the high end coupled with a reduction for brackets under $75,000. It would also reinstate the estate tax, which applies to a few, wealthy individuals. These changes would bring in around $445 million annually. They are not radical; many neighboring states already have similar provisions.
On the corporate tax side, our bill would ensure more successful businesses pay the limited liability entity tax, tighten loopholes that allow profitable corporations to avoid taxation, and eliminate corporate-tax incentives that don’t promote economic growth. This would rein in tax dodging and increase corporate-tax revenue by about $88 million annually.
If we are serious about reforming the tax code and rebuilding the middle class, we have got to demand that the largest and most profitable corporations pay their fair share. They benefit from the investments we all make in infrastructure and workforce.
The legislation would also expand the sales tax to include luxury services, such as limousine, golf course and country club fees. This would generate another $104 million.
One key component of the legislation is a state earned-income tax credit (EITC) — an effective poverty-fighting tool that supports work and helps families afford basic living expenses, pay off debt and invest in education. Most states already have a version of the successful federal EITC.
The legislation would also raise Kentucky’s tax on cigarettes and other tobacco products, including e-cigarettes. This would initially generate about $155 million in revenue, but — more importantly — it would discourage tobacco use and reduce associated costs. Kentucky’s smoking and lung cancer rates are among the highest in the country.
In total, all of these changes would help make Kentucky’s tax system less upside-down. According to analysis by the Institute on Taxation and Economic Policy, the bill would maintain or lower what the bottom 60 percent of Kentuckians pay in overall taxes, while asking more from those at the top — especially the richest one percent — and help generate substantial new revenue for crucial public investments.
On the other hand, “shifting to a consumption-based” tax system — giving those at the top additional income tax breaks and asking more of everyone else through the sales tax — will make our tax system even more regressive.
We should be skeptical of promises that income-tax cuts will improve our economy, and refrain from joining the bandwagon of states that have eviscerated their budgets through this scheme.
Raising revenue equitably will help address our liabilities and allow us to better fund the building blocks of thriving communities — good schools, better health and modern infrastructure.