House Republicans working to flesh out their recent promise of tax reform should heed the evidence that’s piling up in other states: Cutting income and business taxes, and offsetting the losses by raising sales taxes, is no magic economic elixir. It’s more a recipe for starving education, infrastructure and other public services and dishing up more budget crises.
Considering the calamitous results in states that have tried this approach in recent years, you’d think it would have lost its appeal. But no.
Sign Up and Save
Get six months of free digital access to the Lexington Herald-Leader
In a March 7 letter to lawmakers, Chamber President Dave Adkisson called for “moving more toward consumption-based taxes and away from income-based taxes” while also recommending a number of tax cuts that would benefit businesses and drain hundreds of millions of dollars from state coffers.
True to supply-side theory, Adkisson predicted the chamber’s plan would spur economic growth, even though history suggests the stimulus would be scant if any, while the revenue loss would preclude public investments that are economic building blocks.
The chamber is open to “revenue-generating changes” (i.e. tax increases) but its plan would make Kentucky’s tax code more regressive, meaning it would take an even larger share of income from low-earners than from more affluent Kentuckians. Sales, or consumption, taxes fall heaviest on low- and middle-income earners who spend most of their income on life’s necessities.
You can argue about whether that is fair. But probably a more urgent concern for lawmakers: A heavier reliance on sales taxes would fail to provide the reliable, growing revenue stream that Kentucky needs to meet current and future obligations.
Revenue from income taxes has been growing faster in Kentucky than revenue from sales taxes, largely because wealthier individuals are gaining the most in this economy.
Kentucky’s economy has changed, but — except for a proliferation of loopholes and exemptions — Kentucky’s tax code has not. If lawmakers are going to take what they perceive as a risky vote to raise taxes, make it for changes that tap parts of the economy that are growing, thereby putting the state on a sustainable revenue path.
To that end, expanding the sales tax to the fast-growing service sector makes sense. Of the 168 services that other states were already taxing in 2011, Kentucky now taxes only 28 of them, according to an analysis by the Kentucky Center for Economic Policy. Even a modest expansion of the sales tax on services would yield $100 million-plus.
Kentucky also must seek to broaden its tax base by ending some of the exemptions that have grown to exceed state revenue by $2 billion a year. The costs and benefits of these many tax breaks are never examined, and there are no sunset clauses on breaks that go to a favored few while others pay their their full tax freight.
The legislature is considering big breaks for businesses — at the expense of workers — through cuts to unemployment and workers compensation insurance. Remember, too, that corporations and the wealthy get big breaks from the federal tax changes; they can afford to do their part to support education and other public services that benefit us all.