Kentucky’s Efforts at Tax Reform: State Legislature is Unable to Enact Meaningful Change to the Tax Code

By: Jordan Stivers

Kentucky, like many states, suffers from an outdated tax code that fails to keep pace with the modern economy.  In addition to slow economic growth, the state consistently fails to raise enough revenue to adequately fund vital services such as education and investment in healthcare.  The lack of updates to the tax code is not the result of a lack of planning.  Since 1982, Kentucky has undergone twelve tax reform studies, yet the tax code has still not been changed in a meaningful way.  Political battles in the state legislature have prevented the passage of various proposals for the past twelve years since the state Senate became controlled by Republicans, while the House is controlled by Democrats.  There has yet to be a proposal that could pass both houses, and finding one is likely the biggest challenge on the path to tax reform.  Furthermore, the electorate looks skeptically at tax reform proposals that aim to increase revenue, and have a generally hostile attitude towards higher taxes.  As Tom Eblen, a journalist for the Lexington Herald-Leader aptly described the situation:  “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.”  http://www.kentucky.com/2012/12/10/2438142/tom-eblen-tax-reform-commission.html.

In 2012, Kentucky Governor Steve Beshear followed in the footsteps of his predecessors and formed the Blue Ribbon Commission on Tax Reform to study what changes should be made to the tax code, hoping to have more success than past Kentucky governors.  The commission was composed of twenty-three Kentuckians with a wide range of experiences in both the public and private sector, and was headed by Lieutenant Governor Jerry Abramson.  The commission studied past efforts at tax reform, and articulated five guiding principles for Kentucky’s tax reform:  fairness, competitiveness, simplicity and compliance, elasticity, and adequacy.  In the Commission’s final report to the Governor, issued on December 15, 2012, each of the recommendations was rated for how well it achieved each of the principles.

The recommendations made by the commission were somewhat bold, and if implemented would be a huge step forward for the state.  The commission’s plan would add $690 million in revenue during the first year, though the state’s pension obligations would consume at least $350 million.  The first recommendation is to raise the cigarette tax to $1.00 a pack, up from 60 cents.  If necessary, this tax could still reasonably be raised even higher, given the health care costs that smoking causes in Kentucky; and raising this tax to $1.00 makes it compatible with other state cigarette taxes in the region.  Another good recommendation is to amend the state constitution to allow for local-option sales taxes.  A local-option sales tax is a small tax that is added to the sales tax in a particular locality, and is used as a means to raise funds for specific local or area projects.  This would help the larger cities of Louisville and Lexington to raise desperately needed additional revenue to meet the needs of their populations specifically in their localities.

The Commission also proposed making the state income tax more progressive, which would ease the tax burden on low-income wage-earners and put more of it on high-income tax payers, by limiting deductions and exemptions.  Finally, one of the most important and easiest to implement recommendations is to expand the six percent sales tax on goods to include some services such as those related to luxury goods, home-based consumption goods, and services that have a clear nexus to Kentucky.  This would broaden Kentucky’s tax base as the U.S. economy shifts from goods to services.  As Tom Eblen, a journalist for the Lexington Herald-Leader explained, “it is essential that Kentucky tax revenues grow with the economy, and this is one way to do it.”  .  http://www.kentucky.com/2012/12/10/2438142/tom-eblen-tax-reform-commission.html.

The recommendations listed here are only a few of the ones proposed by the Commission in its over four hundred page report.  The latest report is a great start to implementing meaningful tax reform, but it can only be actualized if Kentucky’s political leaders make the reforms a priority, agree to work together and compromise, and then have the political courage to try to convince the public that these reforms are needed.  Though all of these have been very difficult for Kentucky’s legislators and political leaders to do in the past, it is the only way that Kentucky can improve its economic standing.

While this report has offered some fresh ideas for how to update the state tax code, it appears as though no action will be taken by the state legislature this year, as the 2013 legislative session concluded this week.  Both the Speaker of the Kentucky House of Representatives and the President of the Kentucky senate said this week that there was not enough will among the members of the legislature to take on tax reform at this time, and that there should be no special session to deal specifically with tax reform, which the Governor has suggested.  The two leaders went on to say that for tax reform to actually happen, it must take a lot of convincing by the Governor’s administration.  It looks as though tax reform will once again be put on the backburner.

Sources:

Tom Eblen, Tax-reform Commission Showed Courage in Many Recommendations.  Lexington Herald-Leader.  December 10, 2012.  http://www.kentucky.com/2012/12/10/2438142/tom-eblen-tax-reform-commission.html.

Report by the Blue Ribbon Commission on Tax Reform to Governor Steve Beshear.  December 17, 2012. http://ltgovernor.ky.gov/taxreform/Documents/Report/TaxReformCommissionReportFinal.pdf

Editorial, What Happened to KY Tax Reform? Lexington Herald-Leader.  March 10, 2013. http://www.kentucky.com/2013/03/10/2550765/what-happened-to-ky-tax-reform.html.

Ronnie Ellis, Tax Reform to be Looked at During Special Session:  Governor’s Blue Ribbon Commission has Made 92 Recommendations to Alter Code. McCreary Record.  February 5, 2013.  http://mccrearyrecord.com/ky_statehouse_feed/x2056606096/Tax-reform-to-be-looked-at-during-special-session.

Josh Goodman, Kentucky Debating a Tax Overhaul – Again.  The Pew Charitable Trusts – State and Consumer Initiatives.  Accessed March 16, 2013 at http://www.pewstates.org/projects/stateline/headlines/kentucky-debating-a-tax-overhaul-again-85899405022#.

Tax Reform Panel Says Rate Trim, Cap of Deductions, Broader Base Would Generate $659 Million in New Revenue:  Recommends 54 Proposals to Governor.  The Lane Report.  December 17, 2012.  http://www.lanereport.com/16853/2012/12/governors-blue-ribbon-tax-code-commission-files-its-report/.

Tom Loftus, Kentucky Tax Reform Will Likely Wait Until Special Session.  The Courier-Journal.  March 14, 2013.

http://www.courier-journal.com/article/20130128/NEWS010101/301280064/Kentucky-tax-reform-will-likely-wait-until-sp

House Speaker:  No Kentucky Tax Reform Package Coming This Session.  Courierpress.com.  February 19, 2013.  http://www.courierpress.com/news/2013/feb/19/house-speaker-no-kentucky-tax-reform-package/?print=1.

Beth Musgrave, Jack Brammer, Legislature dropped tax reform, killed telephone, scholarship bills.  The Lexington Herald-leader.  http://www.kentucky.com/2013/03/27/2576164/military-voting-hotel-tax-bills.html#storylink=rss.

One thought on “Kentucky’s Efforts at Tax Reform: State Legislature is Unable to Enact Meaningful Change to the Tax Code

  1. Thank God the Republican Senate has blocked efforts by the liberal house to put the tax burden on KY seniors by increasing taxes on their IRAs. God save this country.

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