Op-Ed: Principles for a Tax Reform Plan

By Jason Bailey
April 24, 2017

This column originally ran in the Lexington Herald-Leader on April 21, 2017. It ran in the Courier-Journal on April 24, 2017.

With the 2017 Kentucky General Assembly in the books, Governor Bevin and the legislature will now turn their attention to a possible special session later this year that will focus on tax reform and pensions.

The need to clean up the tax code is among the biggest issues facing the Commonwealth. The growth of tax breaks increasingly undermines our ability to make the public investments that build thriving communities. But whether the governor’s plan moves us forward or actually sets the state back depends on its goals, assumptions and specifics.

For Kentucky to make progress, a tax plan must meet three principles:

1. Reform should not be a tax shift from the wealthy and corporations to low and middle-income Kentuckians.

Kentucky already has an upside-down tax system where the middle class and poor pay more of their income in taxes than do those at the top. And the state’s business taxes are comparatively low already and riddled with breaks that benefit large, profitable corporations.

However, there are serious concerns the governor’s plan may make the situation much worse due to a preference for a “consumption-based” tax system. That means less reliance on income taxes and greater reliance on sales taxes. Because those at the middle and bottom spend more of their income — out of necessity — than do the wealthy, a move towards sales taxes is a shift in who pays from those with more to those with less.

For example, a plan that shifts one-fourth of revenue collected now from income taxes to sales taxes would result in a tax increase for the bottom 60 percent of Kentuckians, according to an analysis by the Institute on Taxation and Economic Policy. In contrast, it would give an average tax cut of nearly $8,000 to the richest 1 percent.

Incomes at the top are soaring even while working families’ paychecks are stagnant. We cannot further squeeze everyday Kentuckians in order to finance more giveaways to the wealthy and powerful corporations.

2. A tax plan must raise more revenue.

There’s no sense talking about tax reform that is “revenue neutral,” meaning it raises no new money. Kentucky needs additional resources to invest in the things that grow our economy and improve well-being. That ranges from high-quality schools to affordable higher education, from a modern infrastructure to improved health. And we’ll need it to meet our obligations to the retirement of school teachers, public health nurses and other state employees.

To his credit, Governor Bevin has said he supports raising new revenue. If a plan doesn’t do so, it’s merely a shift in who pays taxes and a wasted opportunity to address the real issue.

3. New revenue should be real and sustainable over time.

The new revenue a plan expects to generate should be grounded in realistic assumptions. And it must be reliable over time to pay our debts and sustain public investments. That means it cannot depend on false claims about trickle down economic growth resulting from tax breaks to those at the top. Unfortunately the track record of economist Art Laffer is filled with such empty promises, and he is playing a role in coming up with a plan in Kentucky.

Kansas, whose shift to a consumption-based tax system Laffer helped design, has since seen a weak economy, massive budget cuts, three credit downgrades and a state Supreme Court ruling that school funding in unconstitutionally inadequate. And Kansas is not an isolated case: states like North Carolina, Ohio, Oklahoma and Louisiana shifted toward consumption-based tax systems in recent years and faced major revenue shortfalls as a result.

Especially because of soaring inequality in our economy, income taxes are the strongest revenue source states have. Reducing reliance on them in exchange for slower-growing consumption taxes results in less revenue over time. Even if a shift to a consumption-based system is designed to create a bump in new money at first, that revenue would fade away over a period of years and our budget would end up in even worse shape.

Any tax plan is not a good tax plan. The state needs reforms that strengthen the Commonwealth by ending tax breaks that benefit the few and powerful so we can better invest in the things that benefit us all.

It is critical for Kentucky leaders to establish clear boundaries for tax reform: if a plan doesn’t meet the three principles above, it is time to go back to the drawing board.