Kentucky’s tax system needs to be modernized. We need to distribute the total tax burden more fairly among economic segments of the population. But we also need to produce more revenue with which to address our evolving needs in the 21st century. This problem of inadequate revenue must be addressed if we are to maintain, much less grow, our standard of living.
Our tax system is not providing the funds needed to make necessary investments in essential services, such as education, economic development, health care, transportation, infrastructure, energy, and others, that are essential to our continued economic growth as well as to our quality of life. The General Fund has remained relatively flat since 2008, while needs in all of these areas have grown. For example, infrastructure costs alone are daunting, but so are exploding costs for education at all levels, for health care and pensions, for fuel costs, and for safety net supports for those who are unemployed or underemployed during the recession.
Why are revenues so inadequate? Our basic revenue system is dependent primarily on the income and sales taxes. The income tax was established in 1936 and since 1950 has been essentially a flat tax of about 6% on almost all income. It does not have the flexibility to capture income increases resulting from economic growth and inflation since 1950. This inflexibility produces what economists call a “structural deficit” that is not due to economic downturns but rather to internal structural or design problems. Thus the income tax is inadequate to produce the income needed to meet our needs.
The sales tax also contributes to the problem of inadequate revenue, but in a different way. The sales tax base is comprised almost exclusively of goods, which were the basis of most economic transactions when the tax was established. As our economy has shifted away from manufacturing and production of goods toward services, services have not generally been added to the sales tax base. Thus, the tax is not fair, as a significant and growing volume of economic transactions escape taxation altogether; it is not flexible, as it does not evolve with changing social and economic conditions; and it is not adequate, as it does not provide its share of the revenue required to address the needs of modern life.
The share of the General Fund provided by business taxes has also eroded over time, according to Dr. Larry Lynch, Chairman of the Kentucky Consensus Economic Forecasting Group, from 31.3% in 2001 to 27.5% in 2011. This decline reflects changes in the taxation of business income, much of which is now taxed as individual income, and the growing utilization of so-called tax expenditures (incentives) as economic development tools.
Several things need to be done. The income tax needs to be made more progressive, with a new higher bracket for very high income earners. This would increase fairness and flexibility, and increase revenue. Establishment of a state Earned Income Tax Credit would help lower-income working people. Itemized deductions which primarily help high income taxpayers could be capped, eliminated, or phased out at higher income levels.
The sales tax could be expanded to additional services, to reflect shifts in the economy. These could be services used primarily if not exclusively by high income/wealthy taxpayers, such as chauffer services.
These recommendations are easy to say but difficult to achieve, especially in the present anti-tax environment. However, putting our heads in the sand will not solve our problems. We need enlightened leaders who see our circumstances clearly and who tell us the truth, what is wrong and what needs to be done. Gov. Beshear has initiated a commission to review our tax system and to make recommendations for its modernization. Hopefully our citizenry will follow its progress carefully, and support those proposals which will contribute to our common quality of life. |
