Tax reform group has some good ideas; will they go anywhere?

December 10, 2012

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.

Kentucky needs tax reform to stop the annual crisis

February 14, 2009

The late Sen. Russell B. Long of Louisiana famously described the politics of tax reform this way: “Don’t tax you, don’t tax me. Tax that fellow behind the tree.”

Kentucky needs real tax reform, because what Long described is the way we have funded government for years.

We have known for more than a decade that Kentucky’s tax system is broken, because each year comes with another big deficit. (Government spending has increased, too, but Kentucky’s per-capita state and local spending is almost 20 percent less than the national average, according to the Kentucky Long Term Policy Research Center.)

Economists say annual deficits, even in good times, show that Kentucky needs a tax structure that reflects the modern economy — and one that is fair, equitable, efficient and sufficient to meet the state’s needs.

Recent governors and legislatures have settled for a series of politically expedient quick fixes, usually hashed out behind closed doors and pushed quickly through the General Assembly. And they do it knowing that another crisis is just around the corner.

Think this year’s $456 million shortfall was bad? State officials say it’s nothing compared to what we’re likely to see in the next two years.

Gov. Steve Beshear’s proposal for the current deficit was another quick fix, but at least it made some long-term sense. Beshear proposed raising Kentucky’s incredibly low cigarette tax by 70 cents, to $1 a pack. In addition to raising revenue, he hoped to save millions, if not billions, in future healthcare costs by reducing the high number of Kentuckians who smoke.

Raising the cigarette tax closer to the national average attracted support from a broad coalition of business, health and education groups. But they underestimated the devotion to cheap smokes. A compromised rammed through the General Assembly and quickly signed by the governor Friday raised the cigarette tax by only 30 cents, and made up the difference by adding more tax to alcohol.

The liquor industry cried foul, saying that while Kentucky’s tobacco taxes are among the nation’s lowest, alcohol taxes are among the highest. While the abuse of alcohol certainly has health and social costs, they’re much smaller than those caused by the use of tobacco.

Was the additional alcohol tax fair? Probably not, but it was politically expedient. Nobody could argue that it would be better to slash money for education, healthcare and social services than to raise taxes on alcohol, a discretionary product that many Kentuckians consider evil.

Liquor is always an easy target. Forty-nine of Kentucky’s 120 counties don’t allow alcohol sales, and another 41 place restrictions on it. Rep. Steve Riggs, a Louisville Democrat, suggested that only “wet” counties should receive the benefits of future alcohol taxes. Of course, that idea went nowhere.

Riggs’ proposal was similar to the logic, if not the reality, of the coal-severance tax. Speaking of which, Kentucky’s severance tax rate has been 4.5 percent since the 1970s, smaller than in other major coal-producing states. The tax is 5 percent in West Virginia and 7 percent in Wyoming. Raising Kentucky’s severance tax would seem to be a good idea. But don’t expect it to happen, given many legislators’ allegiance to King Coal.

There have been several studies over the years suggesting ways to improve Kentucky’s tax system. Two legislators have made comprehensive tax reform proposals at opposite ends of the political spectrum that could serve as conversation-starters.

Rep. Jim Wayne, a Louisville Democrat, has proposed making the state income tax more like the federal one by more directly linking tax levels to income levels. He would raise the tax on people earning more than $75,000, while providing a 15 percent earned income tax credit for low- and middle-income people.

Rep. Bill Farmer, a Lexington Republican, has suggested eliminating sales tax exemptions. He says that would simplify the system and bring in enough additional revenue to reduce the 6 percent sales tax to 5 percent and eliminate the income tax, too. Farmer’s plan needs to be analyzed to see if the numbers work, and if it would be fair to poor people.

Both plans would tax some services, something economists say is necessary to keep tax revenues growing with the economy.

With Kentucky’s perpetual budget crisis bandaged up for a few more months, what will our leaders do now? Will they hope for a windfall from the federal economic stimulus? Will they decide that slot machines can make state government richer without making Kentuckians poorer?

What they should do is quit looking for quick fixes and easy answers. Otherwise, they’ll just have to keep dipping into reserve funds, hacking away at vital social services and putting off investments in education and infrastructure that are Kentucky’s only hope for a bright future.

We must get serious about real tax reform. We must create a modern tax system that is fair, equitable, efficient and sufficient. Because even if there is a fellow behind the tree, he’s a Kentuckian.