Report Highlights Kentucky’s Need for More Progressive Income Tax

A report released today by the Center on Budget and Policy Priorities (CBPP) shows that income taxes for Kentucky families slightly above the poverty line are among the highest in the nation for that income group.

The report says that in 2011 a two-parent family of four in Kentucky with income of only $28,773 (25 percent above the poverty line) paid $1,021 in state income taxes, an amount higher than any other state.

This dubious distinction is because the legislature has been unwilling to comprehensively reform its income tax to make its brackets more progressive and to reflect modern income levels. While the state’s income tax system was progressive (meaning that rates increase based on ability to pay) when it was enacted in the 1930s, it has not changed much since then making for an almost flat income tax.

The important exception to the state’s nearly flat income tax is that in 2005 the legislature did exempt families below the poverty line from the tax by creating a credit based on family size. But that credit phases out for low-income families slightly above the poverty line.

Kentucky is not one of the 25 states with an Earned Income Tax Credit (EITC), a measure that has been shown to substantially decrease poverty. An EITC supplements low wages, helps struggling families through economic hard times and can improve children’s prospects of future success. It is designed to assist working parents with children, reaches its maximum benefit for families earning around the minimum wage for the year and phases out for families with income around $45,000 depending on family size.

Passing an EITC would help address the problem identified in the CBPP report and make for a fairer overall tax system. A progressive income tax helps offset more regressive sales and property taxes, which take up a larger share of the incomes of low-income people than they do higher-income people. Analysis by the Institute on Taxation and Economic Policy (ITEP) shows that Kentuckians with less than $15,000 of family income pay 9.4 percent of their income in state and local taxes, while Kentuckians with more than $346,000 of income pay only 7.1 percent of their income in those taxes.