Untitled Document

SUPPORTING FACTS
Unfairness re. income tax: In 2007 the lowest 20% income group paid 9.4% of their income in taxes; lower and middle income taxpayers paid 10.8%; while the top 5% paid 7.4% and the top 1% paid 6.1%. [ Institute on Taxation and Economic Policy]

Kentucky ranks 35th among states in the number of services taxed [only 28 compared to Georgia with 160, Ohio with 68, Tennessee 67, West Virginia 105. [The Federation of Tax Administrators, July 2007]
Kentucky taxes utilities more than any other "service" and it impacts the poor more than taxing other kinds of services wealthier people use as opposed to the poor like personal or business services

Long-term cigarette smoking is associated with a higher risk of colorectal cancer, even after accounting for known risk factors such as race, body mass index, and a family history of the disease, according to a new study by American Cancer Society (ACS) researchers published today in Cancer Epidemiology, Biomarkers, and Prevention. http://www.cancer.org/Cancer/news/News/long-term-smoking-increases-colorectal-cancer-risk-study-shows
Kentucky ranks 49th among the states in Well-Being according to the Gallup-Healthways Well-Being Index.

Under our current tax system, our General fund has remained relatively flat since 2008 while infrastructure costs [think bridges over the Ohio], education costs [think college and career and technical education], health care costs [think medicaid and chip programs] and unemployment insurance and other human services needs have escalated.
This is due partly to what is called a "structural deficit" or lack of elasticity. [William F. Fox, "Report to the Subcommittee on Tax Policy Issues, Kentucky General Assembly, 2002]

The state spends more on tax expenditures [exemptions, tax breaks, loopholes] than it takes in. [Office of the State Budget Director] Some of this is for things like grocery and medical exemptions from the state sales tax, but others are for things like economic tax incentives [as in diverting workers' individual income taxes back to the company, sales tax rebates, abatement of taxes for targeted industries or in some cases, all businesses]. This is often done without any later review of promised benefits made for the tax "credits."

*****I would encourage everyone to download [or at least look at it on line] the powerpoint charts on the following site [it is truly eye-opening and a "picture" is worth a 1,000 words in explanation]:
http://www.kypolicy.us/sites/kcep/files/Building%20the%20Commonwealth%20through%20Tax%20Reform.pdf

THE WOMEN'S NETWORK COMMONWEALTH INSTITUTE
FOR POLICY ISSUES AND CIVIC ENGAGEMENT

EXECUTIVE SUMMARY: TAX STRUCTURE REPORT, NOVEMBER 2011

Introduction

Kentucky's tax system is inadequate for the 21st century. It distributes the tax burden unfairly on its residents and fails to provide sufficient revenue to support critical investments in education, economic development, health, transportation, infrastructure, energy, and others. The 21st century global economy demands a highly educated, trained, skilled and healthy workforce for successful participation. Kentucky falls significantly short of these standards. In order to increase our competitiveness, our standard of living and our quality of life, we must modernize our tax system.

Beginning Assumptions

People's views about taxation tend to reflect their views about government. Those who want small, limited government want low spending and low taxes. Those who want government that is responsive to evolving public needs, with adequate public spending strategically directed to priority needs, want adequate tax revenue to support essential public investments to meet those needs.

Kentucky's inadequate revenue stream is not just a function of the recession, but reflects a chronic structural deficit. Kentucky's total tax burden is inequitably distributed on its residents: in 2007 the lowest 20% income group paid 9.4% of their income on taxes; lower and middle income taxpayers paid 10.8%; while the top 5% paid 7.4% and the top 1% paid 6.1%. This distribution is unfair and counter-productive for the health of Kentucky's economy.

Findings

The Committee examined the income tax, sales tax, business taxes, and tax expenditures, in light of four criteria: adequacy; fairness; flexibility; and accountability.

Kentucky's income tax was established in 1936. By 1950 its graduated rates topped out at 6% for all incomes over $8,000. There has been only modest tweaking since. Thus, it is essentially a flat tax. It is not fair, as its rate structure is not graduated to reflect modern income levels; it is not flexible, to capture revenue from income increases due to inflation and growth; and it is not adequate, to secure revenue needed for essential services.

Kentucky's sales tax is problematic for different reason. The tax base is comprised almost exclusively of goods, the basis of most economic transactions when the tax was established. As our economy has shifted toward services, with less manufacturing and production of goods, services have not been added to the sales tax base. Thus, the tax is not fair, as a significant volume of economic transactions escape taxation; is not flexible, as the tax is not evolving with changing social and economic conditions; and it is not adequate, to secure its share of revenue required to address needs of modern life.

The percentage of the Kentucky General Fund provided by business taxes has eroded over time, from 31.3% in 2001 to 27.5% in 2011. This decline reflects a variety of changes in business taxes, including changes in how business income is taxed, with much of it now being taxed as personal income; and the growing utilization of tax expenditures (abatements) as an economic development tool.

Tax Expenditures are granted on promises of economic benefits to be derived from less encumbered economic activity. There are usually contractual responsibilities involved, but they are not transparent and are hard to monitor. Tax expenditures are so pervasive in Kentucky that total tax expenditures exceed the total amount of tax collected. They are not fair to similar economic ventures; they are not accountable; and they contribute to the inadequacy of revenues.

Recommendations

Income Tax: The income tax must be made more progressive, through addition of a higher bracket for very high income taxpayers. This should be Incremental, i.e., an additional 1% or so. This would make the tax fairer and more flexible, and would generate more income. Fairness could also be increased with adoption of a State Earned Income Tax Credit. Itemized deductions, which largely benefit high income taxpayers, could be capped, eliminated, or phased out at higher income levels.

Sales Tax: The sales tax should be expanded to additional services, to reflect shifts in the economy. These should ideally be services used primarily or exclusively by high income/wealthy taxpayers. Any increased burden on small businesses to collect and account for such taxes should be minimized.

Tax Expenditures: Tax expenditures should be subject to periodic re-evaluation to insure that original purposes are still appropriate, and that promised benefits are being realized.

Miscellaneous: The cigarette tax should be increased significantly, to deter youth from smoking and to secure revenues to fund health services for smoking-related health problems. The inheritance tax should be de-coupled from the federal estate tax, to secure additional revenue while protecting family farm owners and small businesses.

Conclusion

Kentucky needs to modernize its tax structure. Its current system is not fair, is not responsive to changing social and economic circumstances, and does not generate sufficient revenue to meet its current needs. The 21st century global economy requires a highly educated, trained, skilled, and healthy workforce. Kentucky falls short of those standards. To increase our competitiveness, our standard of living, and our quality of life, we must modernize our tax system.