The effort to reduce Kentucky’s income tax – the source of 41% of state revenue – gives a big tax break to the wealthy and will harm funding for public education and other essentials over time. But proponents tell a fabricated tale about tax cuts growing the economy, and often point to income tax-free Tennessee as proof.
Tennessee, to hear them tell it, has everything Kentucky does not: rapid business growth, streams of new residents moving in and thriving people. But these claims don’t match the facts. Tennessee is a poor southern state just like Kentucky. In fact, both rank among the states whose residents are most likely to die early, with an average life expectancy five to six years fewer than the top states.
Yes, if you look closely for differences, you can find a few where Tennessee has an upper hand on Kentucky. But the biggest have to do with topography and geology, not taxes. Tennessee never had much coal mining, so it hasn’t suffered from the near-collapse of that industry over the last decade or the challenges of a boom-and-bust extractive economy that has forced people to leave eastern Kentucky for decades. Tennessee’s Great Smoky Mountains is the most-visited national park in the country, with 14 million visitors annually, and is a major reason the state can rely more on sales taxes paid by tourists.
Kentucky actually has relatively strong growth if you look at northern and central Kentucky and the area down to Bowling Green. Populations are swelling in those communities, and two new battery plants are under construction. If Tennessee was so much more successful at getting people to relocate, we would expect to see many people moving there from Kentucky. But IRS data show that every year about 0.3% of the Kentucky population moves to Tennessee, and approximately the same share moves from Tennessee to Kentucky.
Proponents of slashing income taxes also point to a Google Earth photo of one spot along the Tennessee-Kentucky border where there is more population on the Tennessee side. They conveniently ignore easily-available photos of parts of the border where the vast majority of the population is on the Kentucky side – including at Louisville, Owensboro and Paducah. Indiana and Illinois on the other side of those cities have lower income taxes than Kentucky, so why isn’t the growth over there?
Tennessee’s lack of an income tax is a strain on its budget. They now invest far less in K-12 education than Kentucky. They didn’t expand Medicaid in the last decade, which is beginning to result in real health gains in Kentucky. Tennessee is actually a high-tax state for its poor and working class, with the sixth most inequitable tax system. That’s due in part to very high sales taxes, which are applied to groceries.
Other specifics about Tennessee’s tax policy are conveniently ignored. The state has comparatively high business taxes, but that fact doesn’t fit the narrative. Their overreliance on the sales tax results in a revenue system that doesn’t keep up with economic growth. Starting in the 1960s Tennessee has had to increase its sales tax rate every six to eight years to try to sustain services.
Those making bad faith arguments cherry pick examples and never tell the whole story. An honest assessment would find that nearly all states with high median incomes and low poverty rates have income taxes. In fact, the nine states with the highest top income tax rates have done as well or better than the nine states with no income tax when it comes to recent economic growth.
A total of 41 states have an income tax because it’s the cornerstone of an equitable tax system that can generate adequate investments in education, health, infrastructure and quality of life. Toss that away, and watch Kentucky’s problems grow.