Tax reform in Kentucky has always reminded me of that old quip about the weather: Everybody talks about it, but nobody does anything about it.
After nearly a year of study, the Blue Ribbon Commission on Tax Reform that Gov. Steve Beshear appointed to study Kentucky’s tax code and suggest changes finished its work last Thursday and announced recommendations. A final report is due to the governor by Dec. 15.
Will Beshear embrace his task force’s recommendations and try to sell them to the public and legislators? Will the General Assembly’s leaders exercise the leadership needed to build political consensus and make change happen?
You have to give the task force credit. Rather than proposing safe but inadequate “revenue neutral” tax reform, task force members had the courage to recommend a plan that would add $690 million in revenue during the first year.
That’s still short of what Kentucky needs, but it’s a start. Pension obligations will eat up at least $350 million and the state budget has already been cut a dozen times for a total of more than $1.6 billion.
Among the task force’s good recommendations:
■ Raise the cigarette tax to $1 a pack, up from 60 cents. Given the high public cost of smoking-related diseases in Kentucky, it should be even higher, such as the $1.60 that some task force members proposed. But at least Kentucky’s cigarette tax will no longer be the lowest in the region.
■ Amend the state constitution to allow local-option sales taxes. This is a big issue for Lexington, Louisville and other cities desperate for additional revenue to meet the needs of their urban populations and economies.
■ Make the state income tax more progressive, easing the burden on low-income wage-earners and putting more of it on high-income taxpayers. Much of that would be done by limiting deductions and exemptions.
The task force also recommended creating an earned-income tax credit to give relief to low-wage families. It would be modeled on the federal earned-income tax credit, a Republican idea that has been an effective, low-cost tool for reducing poverty among the working poor.
■ Eliminate two taxes that have always seemed like insults to two of Kentucky’s signature industries, horses and bourbon. The first is the sales tax on horse feed. Cattle feed is not taxed, but horse feed is, which has never seemed fair.
The other is the property tax on barrels of bourbon aging in warehouses. Bourbon has become a worldwide phenomenon, and Kentucky makes more than 90 percent of it. But this tax gives both established and new distillers a reason to look to elsewhere to build production facilities, which could risk Kentucky’s industry dominance.
■ Expand the 6 percent sales tax on goods to include some services. This could broaden Kentucky’s tax base as the economy continues to shift from goods to services. It is essential that Kentucky tax revenues grow with the economy, and this is one way to do it.
The task force also recommended cutting corporate taxes by abut $100 million. It is an article of faith among some business people that corporate taxes need to be as low as possible. But that seems unnecessary, because studies have shown that Kentucky’s corporate taxes already are competitive with peer states.
“What are we going to gain by making them lower?” asked Jason Bailey, a task force member and director of the Kentucky Center for Economic Policy, a Berea-based research group. “The corporate income tax is a very small part of doing business.”
Rather than cutting Kentucky’s already-low corporate taxes, Bailey thinks more jobs could be created by investing that money in education, health and infrastructure. Those are areas that companies look at when choosing a good place to do business, and they are areas where Kentucky is behind many other states.
Overall, though, the task force recommendations are the most positive talk in decades toward real, much-needed tax reform. Whether Kentucky’s political leaders will do anything about it remains to be seen.