Yesterday, Governor Matt Bevin announced he would be vetoing both the biennial budget bill, HB 200, and the revenue bill, HB 366. The vetoes provide an opportunity for the legislature to have a second chance at passing a better revenue bill to restore investments in our commonwealth.
We organizations representing diverse groups across the commonwealth appreciate that the legislature has acknowledged the current tax system does not produce adequate revenue to invest in Kentucky, and is looking for ideas to change that. After a decade of budget cuts, Kentucky must clean up its tax code so we have more revenue to improve our schools, human services, infrastructure and more while meeting our obligations.
As passed by the legislature, the new tax plan is a tax shift, giving a hefty tax cut to the wealthiest and corporations while asking more of everyone else. The top 1% of Kentuckians—who make on average over $1 million a year—already pay less as a share of income in taxes than other Kentuckians. HB 366 would widen that gap.
The plan also purports to raise new revenue, but questions remain about its immediate impacts as it relies on uncertain revenues from federal conformity and includes both tax increases and tax cuts with hard-to-predict revenue results. It will also have a harmful impact on revenues over the long-term. Income taxes grow better than consumption taxes, so a shift from the former to the latter means revenue growth will slow further over time. A big reason is that a disproportionate share of income growth in today’s economy goes to those at the very top. When they pay less through lowered income taxes – and lower-income Kentuckians are asked to pay more — the state’s ability to invest in the programs and services that help us all diminishes.
It is important that Kentucky address big issues like fixing its revenue system in a more deliberative and thoughtful way—one that involves all Kentuckians in crafting a comprehensive plan that will truly work for the entire state. That task is critical for our state moving forward.
In the meantime, given the short time remaining in this session, we offer specific ideas to improve this plan, raising over $500 million annually in a more balanced way and further improving our budget:
- Remove the individual and corporate income tax rate changes. Instituting a flat tax is a huge tax cut for the wealthy and results in a massive loss of revenue. By keeping tax brackets as they are in current law, we could build a better budget with fewer cuts and more investment in vital areas.
- Keep the existing limit on itemized deductions for extremely wealthy individuals. Conformity with federal law means that the Pease limit on itemized deductions will be removed, a large tax cut for the very wealthy.
- Decouple from the pass-through income exemption that comes along with federal tax law conformity. Not doing so creates a new special interest loophole for one type of corporate income that is likely to widen over time, draining resources from the investments that benefit us all.
- Remove the provision that switches Kentucky to single sales factor. Allowing corporations to determine their profits based solely on sales will decrease General Fund revenue and not accurately reflect the benefit entities derive from the investments the state makes.
Advocacy Action Network, Appalshop, Fahe, Fairness Campaign, Forward Kentucky, Friedell Committee, Homeless and Housing Coalition of Kentucky, Kentuckians for the Commonwealth, Kentucky Association of Transportation Engineers, Kentucky Center for Economic Policy, Kentucky Council of Churches, Kentucky Equal Justice Center, Kentucky Mental Health Coalition, Kentucky Public Retirees, Kentucky State AFL-CIO, Kentucky Transportation Employees’ Association, Kentucky Voices for Health, Mountain Association for Community Economic Development, National Association of Social Workers – Kentucky, National Conference of Firemen & Oilers, NKY Justice and Peace Committee, SEIU, The Women’s Network, United Food and Commercial Workers Local 227