Editorials

Tax shortfall signals need for reform

Gov. Matt Bevin entered the House of Representatives chambers in January for the start of its first legislative session with a Republican majority after 95 years of Democratic control.
Gov. Matt Bevin entered the House of Representatives chambers in January for the start of its first legislative session with a Republican majority after 95 years of Democratic control. cbertram@herald-leader.com

There’s been plenty to distract Gov. Matt Bevin and state legislators from the challenging task of reforming the Kentucky tax code.

But with the news last week that revenues are expected to fall over $100 million short of projections by the time the state fiscal year ends June 30 — likely spurring further cuts to an already-bare-bones state budget — reforming Kentucky’s tax code needs to take center stage.

Although he hasn’t set a date, Bevin has indicated he will call a special session on tax reform sometime in the fall. He has asked law firms to bid on writing a new tax code for Kentucky, with a deadline of late September to deliver that document.

But legislators can’t wait until late September to take on something as big, complex, important and politically volatile as overhauling the tax code. And they can’t rely on an outside contractor to write a code that will be fair to citizens and generate enough money to provide government services they need and demand.

Bevin and other Republicans seem taken with the idea of lowering income taxes and increasing sales taxes, which they call consumption taxes.

It’s an approach that has been disastrous in Kansas, where legislators this week are debating a $1 billion tax increase to fill their budget gap, and there’s no reason to believe it could be successful here.

Income taxes account for 43 percent of Kentucky’s revenue. Taking a chunk out could dig a deep hole that would be hard to fill by increasing sales taxes, which now contribute 33 percent of the state’s revenue.

It’s also just not fair. Anna Baumann, with the Kentucky Center for Economic Policy, made this case Monday on KET’s Kentucky Tonight Monday during a discussion on tax policy.

Cutting the top income tax rate from 6 percent to 5 percent, she said, would cut taxes for the wealthiest 1 percent of Kentucky taxpayers by $7,000 a year, while adding another penny to the 5 percent sales tax would increase the total tax burden on 60 percent of Kentucky taxpayers at the lower end of the income scale. And as that lower income majority becomes poorer from that burden tax collections will decline.

Bevin has promised to look at Kentucky’s hundreds of generous tax exemptions (we exempt more taxes than it we collect), claiming “there are no sacred cows.” We agree with the critical exception of the tax exemptions on food and medicine. Kentucky is a poor state; people struggling to survive should not face higher bills at the grocery or drug store. But there is every reason to look at taxing the rapidly growing service sector.

In January, well before he knew there would be a revenue shortfall, Bevin, in his state of the commonwealth address, promised tax reform, including raising more tax revenue. His fellow Republicans didn’t react well then to tax increases and they don’t seem to have warmed up to the idea since.

Rep. Steven Rudy, R-Paducah, chair of the House Appropriations and Revenue Committee, said on the KET panel that if he wants to increase taxes, “it’s imperative the governor sells this to the people of Kentucky and to members of the Kentucky General Assembly.”

Even more imperative, the governor needs to have a tax plan that funds the state adequately without impoverishing even more of its citizens.

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