It’s been just over a month since Congress passed the first major overhaul of the federal tax code in more than a generation, but the benefits of the new law are already apparent. All throughout the country, stories are emerging of cash bonuses, increased wages, expanded benefits and much-needed new investments within the U.S.
Just consider the rapid progress and growth we’ve seen in Kentucky alone:
▪ Louisville’s Brown-Forman is establishing a charitable foundation to support numerous regional non-profit organizations. The company is also putting $120 million into its pension plan.
▪ AT&T gave its more than 2,500 Kentucky employees $1,000 bonuses and has committed to making $1 billion in investments in the U.S.
▪ Humana, with 12,000 employees in Kentucky, is accelerating pay incentives and is raising the minimum wage for full- and part-time employees to $15 per hour.
▪ U.S. Bank is giving $1,000 bonuses to 3,000 employees in Kentucky.
▪ Walmart, with almost 30,000 employees in the commonwealth, is distributing $1,000 bonuses, increasing its minimum wage, and expanding parental leave benefits.
▪ Atlas Air is rewarding its 200-plus Kentucky employees with $1,000 bonuses.
To see all of this within just a few short weeks is nothing short of amazing. But the real benefits are still to come. Economic analysts who have studied the new tax law predict that it could increase long-term gross domestic product growth by 3 percent to 4 percent. That translates into hundreds of billions of dollars in unprecedented economic acceleration.
So with the resounding success of tax reform at the federal level, why not do the same in Kentucky and enact tax reform of our own? The commonwealth’s tax code has gone years without meaningful reforms and is packed full of inefficiencies, questionable expenditures, and taxes that negatively affect some of our signature industries.
In fact, just recently, the nonpartisan Tax Foundation ranked Kentucky’s business tax climate 33rd in the nation. Their study measures the design and structure of state tax systems and assesses how competitive these systems are at attracting new businesses and generating economic growth.
The significance of Kentucky’s ranking is best understood by considering it from a regional perspective. To our east, West Virginia ranked 19th. To our west, Missouri ranked 16th. To the south of us, Tennessee ranked 14th. To our north, Indiana ranked ninth.
What this tells us is that, in the battle for business and talent attraction and retention, we’re being outmaneuvered. Comprehensive and innovative tax reform, however, can reshape the status quo and increase Kentucky’s business competitiveness. Here’s how to do it right in just three steps.
Start with simplification. The General Assembly should look for ways to align state and federal tax rules in order to increase the ease of compliance and reduce administrative costs for both individuals and businesses.
Second, reform Kentucky’s tax code to be broad-based and not impose a disproportionate burden on any specific sector or industry. This should include a data-driven evaluation of the effectiveness of current tax expenditures on economic growth and the elimination of the inventory tax. The General Assembly should also phase in a new formula based on a single factor of sales and better assign revenue and income based on the location of services.
Third, the tax code should transition away from taxing productivity to taxing consumption. Lower rates for individual and corporate taxes to the greatest extent possible — just as the federal tax law recently did. Remove exemptions from state sales taxes for some services and offer new exemptions for business-to-business transactions. In addition, increase taxes on cigarettes and give local governments more options for generating revenue.
We are, of course, painting in broad strokes with these recommendations. No one is under any illusions that tax reform in Kentucky will be simple or easy. But the success of federal tax reform underscores the benefits of taking up this challenge, while comparisons of Kentucky’s tax code with our neighboring states stresses the necessity.
Sarah Davasher-Wisdom is chief operating officer of Greater Louisville Inc.