Business-friendly or ‘bleak’? Reactions to House Republicans’ big tax reform bill
Reactions to the House Republican plan for major tax reform ranged from heralding the legislation as the beginning of a thriving new business-friendly era for the state to warning that it ushers in a regressive, “bleak” future for poor Kentuckians.
The bill, Rep. Jason Petrie’s House Bill 8, would reduce the state’s individual income tax rate from 5 percent to 4 percent next Jan. 1 and aims to eventually eliminate the state’s income tax.
The responses to the legislation mostly depend on who you ask.
The Kentucky Center for Economic Policy in Berea warns that it puts an unfair burden on poor people, some of whom pay little to no income tax and spend a higher proportion of the income they earn than wealthier Kentuckians.
“If anything in the direction of HB 8 becomes law, Kentucky will be forced to ravage funding for its schools and other public institutions and will face a bleak future where the wealthy are even wealthier and the rest of Kentuckians have scant access to education, health care and other critical needs,” KCEP said in its analysis.
Backing the plan are business groups, led by the Kentucky Chamber of Commerce, which says Kentucky needs to change how it taxes people and companies in order to be more competitive for employers. Phasing out Kentucky’s income tax will make the state attractive as it looks to recruit new economic opportunities, the Chamber says.
“Kentucky relies on individual income taxes for revenue far more than the national average,” the Chamber said in a recent report. “Income taxes are not only more economically harmful than consumption-based taxes but also serve as less stable sources of state revenues.”
Andrew McNeill, a former staffer in Matt Bevin’s administration and visiting policy fellow for the Bluegrass Institute said that the plan will be a “huge win” for individuals and entrepreneurs.
“The specifics of the sales tax base warrants closer inspection but it does fit with the principles of favoring consumption-based taxes over taxing income,” McNeill said. “It’s especially important that the plan continues to exempt groceries and utilities from the sales tax.”
The former Bevin staffer also lauded the plan for not increasing the gas tax.
Charles Aull, a senior policy analyst at the state chamber, said that a shift like one presented in Petrie’s plan would help draw population into Kentucky. He said that Tennessee, which has never had an income tax, is growing in part because it doesn’t have an income tax.
Rep. Lisa Willner, D-Louisville, doesn’t buy the argument that income tax cuts influence population movements as much as advocates purport.
Willner has an alternate tax plan on the books. She said her House Bill 201 has “zero” chance of passing, but is “fair and progressive.” It features a graduated income rates that taxes wealthy Kentuckians at a higher rate than those who make less money.
The Louisville legislator warned that the reform will lead to “giveaways” for the wealthy and questioned how state revenue lost via the income tax will be replaced.
“‘Cutting taxes’ may sound like good news, but the tax plan proposed in HB8 is just the opposite for everyday working Kentuckians,” Willner said. “Like the tax reforms enacted in 2018, this plan will lead to tax giveaways for the wealthiest Kentuckians, while asking those who can least afford it to shoulder a disproportionate share of the burden.”
If passed in the House, the plan would also need the blessing of the Senate, which is also dominated by a Republican majority, 30-8.
In an interview on Tuesday before the House Bill 8 was introduced, Petrie’s counterpart in the Senate, Appropriations & Revenue Chair Chris McDaniel, R-Taylor Mill, said that the desire for tax reform was shared by Republicans in both chambers.
He said at the time that he hadn’t communicated much with the House on the issue, but his main criteria for evaluating a proposal were: increasing “competitiveness” for businesses and talent, being sensitive to how state tax reform would affect local tax structures and making sure not to “blow a hole”
McDaniel and Petrie both have referenced Kansas as an example of what not to do when proposing such a shift in the tax base.
The Sunflower State saw major hits to its revenue and sclerotic economic growth due to a fast shift away from income tax without a commensurate increase in sales tax. The move caused some public schools to shut down or consolidate and Kansas’ bond rating took a major hit.
McDaniel said the “hard part” of tax reform is figuring out what will be taxed to make up for lost income tax revenue – spending cuts or sales tax increases.
“The easy vote is we’re going to reduce your income tax. The hard vote is ‘we’re either going to cut spending by a billion dollars or we’re going to expand the types of things you pay sales tax on,’” McDaniel said. “Tax reform when you have to have a balanced budget is tough, and I’m not going to permit an action that leaves us in a scenario where we walk out with an unbalanced budget.”
As for yet untaxed items not included in Petrie’s proposal, McDaniel mentioned two commodities that are outlawed in Kentucky: medical marijuana and sports wagering.
Rep. Jason Nemes, R-Louisville, has a bill that would legalize certain kinds of medical marijuana that he said has a good shot at passing both chambers. Rep. Adam Koenig, R-Erlanger, has said he plans to file legislation that would legalize sports betting in Kentucky.
“The desire to do tax reform is as old as taxes itself. No one likes to pay taxes, but inside of the confines of some type of functional government it’s a necessary evil,” McDaniel said. “It’s just a matter of how you do it most effectively to not disadvantage those who live here and also incentivize others to come here.”
This story was originally published February 25, 2022 at 5:43 PM.
