Kentucky broadened and flattened its state tax structure in early 2018 and now has encouraging results from the first fiscal year under those reforms. Tax revenues beat state budget expectations by $194 million and topped 2018 totals by $550 million.
With that success, the governor and Kentucky General Assembly can now look at further tax reforms. State business leaders are quite clear about what they advise: more broadening, more flattening and a shift from income taxes to consumption taxes.
The 2018 reforms broadened the range of goods and services to which the state’s 6 percent sales tax applies, including tickets to performances and events put on by nonprofit organizations, health club membership fees, labor on car repairs, pet care, dry cleaning, and lawn and landscaping services.
Individual and corporate tax rates were simplified from multiple brackets to one flat rate for everyone; that lowered the top rates. A pension income exemption for the first $41,110 a beneficiary receives was decreased so that tax begins after the first $31,110 in pension income.
The Office of the State Budget Director attributed the commonwealth’s fiscal 2019 revenue growth to economic development efforts that have yielded $20 billion in new investment announcements since December 2015 that created 54,000 new jobs and to tax reform policies that broadened the tax base and modernized the rate structure. In addition to those “announced” projects, Kentucky had further billions in investment and thousands more jobs from projects that were not “announced,” meaning they were undertaken without benefit of state and local incentives.
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Tax policy is not the only factor involved in business, job and income growth, but it certainly helps. Income tax rates tip some of the final choices decision makers arrive at in choosing where to locate or expand, and influence choices made by the talent Kentucky businesses must recruit to be successful.
Kentucky now has a flat 5% income tax. Ohio’s eight income tax brackets top out at whisker less than 5%. Indiana has a flat income tax of 3.23%. Tennessee has no income tax, and it has been a business and population-growth success story. Kentucky’s business community likes to cite the experience of our neighbor and competition to the south as a good example to follow.
Tennesseans do pay the highest combined average sales tax in the United States, but that has not prevented it from attracting strong business, job and income growth at an enviable rate. And since 2014, Tennessee has provided community college to its residents at no cost – yes, free – in an effort aimed squarely at improving workforce development.
Kentucky doesn’t have to follow Tennessee’s path, or Indiana’s or Ohio’s, but Kentucky should continue with further incremental tax reforms and modernizations. The sales tax exemptions removed last year produced no reports of businesses closing as a result – to the contrary, business grew. Removing exemptions did allow a decrease in income tax rates. It was a conservative approach, which is our state’s culture.
Legislators and whomever Kentuckians elect this fall as their governor should take further tax reform steps in the 2020 session of the General Assembly. The goal is not to jump to the finish line but to move forward. To do nothing, as the state did for too many years, is to fall behind. Other “service” products remain exempt from Kentucky sales tax, hundreds of millions of tax dollars worth. That’s just for starters.
A wise strategy for public and elected officials is to maintain active lines of communication with the state’s private sector, and private sector leaders for their part must be proactive in expressing their views and offering advice. Government exists to serve the private sector, but achieving a result that serves us all requires active participation.
It is common to hear that individual ideas, voices or votes don’t matter. The truth is: All it takes to have influence is to have an opinion and express it. Time to get to work.
Meanwhile, it’s time to start efforts toward updating the state’s decade-old economic development incentives. ■
Mark Green is executive editor of The Lane Report. Opinions expressed are those of the writer and not The Lane Report.
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