FRANKFORT, Ky. — Ensuring that Kentucky’s sales tax excludes business transactions would support economic growth and strengthen recent state tax reform efforts, a new report by the Tax Foundation argues. “Kentucky Sales Tax Modernization: Keeping the Sales Tax on Sales, Not Production” highlights the pro-growth tax reforms pursued by Kentucky lawmakers but stresses the importance of not including business purchases in the state’s sales tax base.
“Kentucky’s recent pro-growth tax reforms remain the envy of lawmakers in many other states,” the report says. “But as policymakers continue efforts to improve Kentucky’s tax structure and competitiveness, they should keep in mind that not all offsets are created equal. Applying the retail sales tax to major new categories of business inputs would transform Kentucky’s sales tax from a relatively well-designed tax on final, personal consumption into an economically harmful, ill-designed tax on in-state production.”
The Tax Foundation is a nonpartisan research organization that has served as one of the nation’s leading voices on pro-growth tax reform. The report – produced independently by the Tax Foundation – was supported by a grant from the Kentucky Chamber of Commerce, Commerce Lexington Inc., Greater Louisville Inc., and the Northern Kentucky Chamber of Commerce.
This new report takes a deep dive into sales tax issues in Kentucky. It demonstrates that a properly designed sales tax should apply exclusively to final consumer purchases. When applied to business purchases, the sales tax effectively becomes a tax on production and results in tax pyramiding, higher prices for consumers, and economic inequities between large and small businesses and different industries. “Taxing final consumption is more pro-growth and economically efficient than taxing income, but taxing business inputs is more economically harmful than taxing income, as it takes the factors of production in a concentrated manner, doubling down on the worst features of an income tax,” the report concludes.
Some of the report’s key highlights include:
- An overview of sales tax principles, concepts, and definitions
- Analysis of how applying the sales tax to business purchases results in tax pyramiding and higher prices for consumers
- Study of recent sales tax changes in Kentucky and how Kentucky’s sales tax base compares to competitor states, including Indiana, Ohio, and Tennessee
- Discussion of how sales taxes on business purchases distort economic growth and affect decision-making for both U.S.-based companies and foreign firms looking to invest in a state like Kentucky
- An examination of efforts in other states to remove or limit business purchases in their sales tax bases
“Kentucky’s recent progress on tax reform has put the state on a new economic trajectory and a path to compete with other states for workers and new opportunities,” said Kentucky Chamber Center for Policy and Research Executive Director Dr. Charles Aull. “It is critical, however, that we not overlook the importance of a well-designed sales tax, especially as we work to support small business growth and attract out-of-state firms. Kentucky policymakers should read this new report closely and leverage it to continue building a competitive state tax code.”
“Kentucky Sales Tax Modernization: Keeping the Sales Tax on Sales, Not Production” marks the Tax Foundation’s second major report on tax reform in the Commonwealth. In 2021, the Tax Foundation released a comprehensive reform guide for Kentucky with grant support from the Kentucky Chamber. This report helped lay the groundwork for a new plan approved by lawmakers in the 2022 legislative session to reduce individual income taxes in Kentucky gradually. The Tax Foundation’s new report on sales tax and the report from 2021 can both be found on the Kentucky Chamber’s website.
