Kentucky can’t afford to ignore tax reform ideas

June 6, 2009

I sat through a long and painful presentation Thursday at a meeting of the General Assembly’s Interim Joint Committee on Appropriations and Revenue.

It reminded me of a bad trip to a dentist, complete with noise and vibration from workmen drilling into a nearby wall in Frankfort’s Capitol Annex.

The presentation itself was excellent, and it was obvious that Mary Lassiter is a smart and capable state budget director. What made it painful was Lassiter’s step-by-step outline of Kentucky’s financial mess — and the clear but unspoken message that it won’t improve much until lawmakers enact real tax reform.

The national economic recession isn’t the problem, although it has turned state government’s steadily rising river of red ink into a holler-washing flood.

The problem is that Kentucky is trying to operate a 21st century state on a tax system designed for a mid-20th century economy. It hasn’t worked for years, and everyone knows it.

“Clearly we’re going to have to do something,” said Rep. Jesse Crenshaw, a Lexington Democrat, echoing several others lawmakers’ comments. “We can’t come back here every six months or every year without addressing the larger problem.”

Here’s the basic issue: Kentucky has an income tax, but its limited range reflects 1950s income levels. That means low-income people pay too much and high-income people pay too little. Kentucky has a sales tax, but it covers mostly goods and not services, the fastest-growing part of the economy.

The problem and possible solutions have been studied to death for years. But governors and legislators have never found the political courage for anything but quick fixes that ignore the larger issues.

Fortunately, the last half-hour of the meeting was devoted to lawmakers’ first real discussion of two good tax-reform proposals. One comes from Rep. Jim Wayne, a Louisville Democrat, and the other from Rep. Bill Farmer, a Lexington Republican.

The two plans are different in philosophy and approach. But they both meet the four tests of a good tax system: being fair, equitable, efficient and sufficient to meet Kentucky’s needs.

Neither plan will be considered during this month’s emergency special session, which will be yet another quick-fix exercise. But maybe, just maybe, they will set the stage for real tax reform when the General Assembly begins its next regular session in January.

Wayne’s plan would update the income tax range to make it fairer. He would raise the tax on people earning more than $75,000, while providing a 15 percent earned income tax credit for many poorer people.

Wayne’s plan also would tax services used mainly by rich people — such as country club dues, aircraft leasing and limousine rental. He also would restore the “death” tax on estates worth more than $1 million.

Farmer’s plan would eliminate personal and company income taxes and cut the sales tax rate from 6 percent to 5.5 percent. It would extend the sales tax to most personal and professional services, including commercial real estate leases. But there would be no sales tax on goods and services that meet basic human needs, such as groceries, housing and medical care.

While I admire the social justice idealism behind Wayne’s plan, I think Farmer’s approach would be better for Kentucky’s future, for many reasons.

Farmer’s plan makes Kentucky more economically competitive with other states. It encourages people to make money and save money. It encourages businesses and financially successful people to come here and stay here, increasing the amount of money that will be spent on taxable goods and services.

Farmer’s plan would be easy for the public to understand. It also would be an easy, cheap and effective way for the state to collect revenue. As the economy grows, tax revenues would grow with it.

It would be important that lawmakers keep such a sales-tax system “pure” — in other words, not exempt some products and services for reasons other than to protect poor people. Otherwise, the special-interest lobbyists will have a field day and the system won’t be fair.

Also, it would be important to remove many existing state taxes and fees that unfairly target — or exempt — certain businesses, products and people.

Another attraction of Farmer’s plan is that, politically, it would seem to stand a better chance of passage. That’s because it would allow politicians to brag that they eliminated income taxes and cut the sales tax rate, too.

Kentucky’s tax system doesn’t need another bandage; it needs major surgery to make this state the healthy, prosperous place Kentuckians deserve. Lawmakers have two realistic approaches from which to choose, and the timing couldn’t be more urgent.