Politics & Government

Tax reform proposals again face long odds in Frankfort

FRANKFORT — A proposal to overhaul the state's tax system by cutting taxes for the state's poorest residents, increasing income taxes on its wealthiest and expanding sales taxes to some services faces long odds again this year.

Rep. Jim Wayne, D-Louisville, who filed House Bill 318, said one independent think tank has estimated the tweaks he is proposing would generate $480 million in additional revenue. An official cost estimate by legislative staff on the bill has not been completed, Wayne cautioned.

Wayne has filed similar proposals in the past. This year he added an additional 50-cent sales tax to cigarettes and additional taxes on other tobacco products, a move he says might entice more legislators to back his plan.

Rep. Bill Farmer, R-Lexington, also has filed legislation, House Bill 196, that would expand sales taxes to other services, increase the 6 percent sales tax to 7 percent, and eliminate corporate and income taxes.

Wayne said it's unlikely that any major tax reform will be enacted during this legislative session, but he hopes he will at least get a hearing to discuss his and Farmer's proposals.

"It should be equitable, it should be buoyant, it should be flexible, and it should grow with the economy," Wayne said of the state's tax system.

Tweaking the state's tax code has long been on some legislators' to-do lists, but there has been little movement in the area during the past several years.

The recession and repeated budget shortfalls have brought into sharp focus the fact that Kentucky's tax system no long er brings in enough revenue to support all the services it provides.

Since 2000, the General Assembly has spent about $3.6 billion more from the General Fund than the state collected in revenue.

University of Tennessee professor William Fox predicted the situation in 2002 in the now-famous Fox Report. Yet because changes to the tax code probably would result in an increase in taxes on some items and some people, there has been little political will to tackle the thorny topic.

Senate President David Williams, R-Burkesville, has sponsored Senate Bill 1, which would create a council of tax experts to study the state's tax code and make suggestions on how to change it. The legislature would have to approve or reject the plan without making changes.

Williams has criticized Gov. Steve Beshear and the House, where all tax measures must originate, for dragging their feet on the topic. SB1 has been passed by the Senate. It has not been put to a vote in the House.

House Speaker Greg Stumbo, D-Prestonsburg, and other Democrats have said similar task forces in other states failed. They also note there are no voting legislators on Williams' panel. Without legislative buy-in, there would be little support for the proposal, Stumbo said.

Stumbo on Friday said he would meet with Wayne next week to discuss his proposal. And if Wayne and Farmer get enough support, they could get a hearing this legislative session.

Wayne's and Farmer's proposals share an expansion of the state's sales tax to services that are not taxed now. Wayne would like to see more luxury services taxed, such as limousine services.

"It's a much more progressive tax system," he said of his proposal. "As the economy expands, the revenue expands."

Payment for services is growing more than any other sector of the economy, but it's taxed the least, Farmer has said. Kentucky taxes few services, among them rentals of tangible property, such as a hotel room or a tuxedo; parimutuel betting admission; and most admissions to amusement parks, circuses, fairs, cultural events and professional sports.

Most states tax many more services. Kentucky ranks 38th for the number of services taxed out of 46 states that have sales taxes, according to the Center on Budget and Policy Priorities.

Wayne's proposal would decrease taxes on most of the population — those who make less than $76,000. It would increase taxes gradually on those who make more than $76,000 a year.

Currently, those who make the most in Kentucky pay the least in income taxes in proportion to their incomes, Wayne said.

Farmer said tax reform won't happen this legislative session without the backing of Beshear, who has said repeatedly that no taxes should be raised during tough economic times.

"The best I can hope for is a fair hearing," Farmer said.