Kentucky tax reform proposal a mixed bag

Kentucky tax reform proposal a mixed bag

A panel created by Kentucky Gov. Steve Beshear to assess possible changes to the commonwealth’s tax system is proposing an array of tax reforms, some of which will be greeted and others loathed by economic conservatives.

According to the AP, the Blue Ribbon Commission on Tax Reform is recommending “lowering individual and corporate tax rates,” but also “raising the cigarette tax and expanding the sales tax to certain services.” 

If passed and signed into law in 2013, the full package would be estimated to increase revenues by over $650 million per year–something that suggests it is a mixed bag at best, from the perspective of tax increase opponents.

However, the revenue projections associated with the package could prove to be off-base. 

On the one hand, as more household income in America is spent on services relative to, for example, goods, a tax on services could over-deliver, depending on how it might be structured. 

The Commission proposal is silent on what specific services might be taxed. However, the fact that more Americans are spending a bigger proportion of their household income on services than in prior decades is one reason that conservatives and liberals alike have urged a shift away from the current system and towards a system that includes, or replaces certain existing taxes with, a value added tax (VAT).

On the other, cigarette tax increases rarely deliver the revenue projected. 

According to the National Taxpayers Union, “41 of 59 state tobacco tax increases from 2001-2006 were followed by more expansive tax increases within two years, as states attempted to make up for tobacco revenue that never appeared.” 

In Kentucky’s case, the state could be diminishing its ability to benefit from cross-border sales in the aftermath of recent, large cigarette tax increases in neighboring Illinois (thus reducing revenue brought in via the cigarette tax). 

Another consideration is that while the income tax cuts proposed would benefit the state’s poorer taxpayers and a corporate rate cut could stimulate job growth that might benefit the unemployed, cigarette taxes are highly regressive. A recent study showed that nationally, smokers with the lowest incomes “spend about 14 percent” of their household income on cigarettes.

Kentucky’s House and governorship are controlled by Democrats; its Senate is controlled by Republicans. This makes the precise final composition of any tax reform package hard to predict. 

However, those advocating for lower taxes will likely applaud the Commission’s recommendation to cut corporate and income taxes, and urge the legislature to abandon efforts to expand the state’s sales tax and increase the cigarette tax.