New ITEP Report Focuses on the Need for Tax Reform in Kentucky

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Who should pay to fix the billion dollar hole in Kentucky's budget? One group of lawmakers thinks low- and middle-income families, the same families hit hardest by the economic crisis, should foot the bill. Another group of lawmakers thinks that well-off families, the same families who have benefited the most from the tax-cutting sprees and the economic changes of the last several years, can afford to give something back. A new report from ITEP shows how different the two approaches are.

Both views were on display yesterday during a meeting of the Interim Joint Committee on Appropriations, where lawmakers discussed these two very different alternatives for solving the state's anticipated shortfall for the next fiscal year, now estimated to total $996 million.

HB 51 PHS would repeal Kentucky's personal and corporate income taxes as well as its limited liability entity tax, reduce the sales tax rate from 6.0 to 5.5 percent, and broaden the sales tax base to include a variety of services. Estimates show that in future years this legislation would actually cost the state money and make Kentucky's tax structure more regressive.

The other bill heard on Thursday, HB 223, would raise tax rates for well-to-do Kentuckians, create a new income tax credit based on the federal Earned Income Tax Credit (EITC), reinstate a version of Kentucky's estate tax, and also subject a variety of services to the sales tax. HB 223 would both increase state revenues and make the state's tax structure more progressive.

For more on these proposals, read ITEP's report, Tax Reform in Kentucky: Serious Problems, Stark Choices.

Like many state tax systems, Kentucky's currently faces two serious problems. The first -- and most immediate -- is that Kentucky's tax system is insufficient. It fails to produce enough revenue to fund the public services on which Kentuckians rely. The second problem, while less pressing, is arguably more persistent. Kentucky's tax system has long been inequitable, requiring low- and moderate-income residents to pay more in taxes relative to their incomes than wealthier individuals and families. In fact, in 2007, state and local taxes as a share of income were nearly twice as high for middle-class Kentucky taxpayers as they were for the most affluent.

Ideally, lawmakers would see this situation as an opportunity. Hearings like those conducted yesterday are steps in the right direction. However, it appears that Governor Beshear is turning his head away from discussions of comprehensive tax reform. When the special session scheduled to start June 15 begins, comprehensive tax reform isn't likely to be on the table. Instead, gambling, budget cuts, and federal stimulus dollars are likely to be on the legislative agenda. Precisely because Kentucky is facing such challenges, now is the time to reform the state's tax structure. HB 223 would certainly be a leap in the right direction.

Thank you for visiting Tax Justice Blog. CTJ and ITEP staff will soon retire this domain. But ITEP staff are still blogging! You can find the same level of insight and analysis and select Tax Justice Blog archives at our new blog,

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