KY Policy Blog

State EITC Would Make a Regressive Tax System Fairer

By Ashley Spalding
May 15, 2014

Previous posts have described how a state Earned Income Tax Credit (EITC) would help working low-income Kentuckians make ends meet and reach every corner of the state. A state EITC would also make the tax system fairer, as shown in a new report by the Institute on Taxation and Economic Policy (ITEP).

Kentucky’s tax system has a lot of room for improvement in the area of fairness. Low- and middle-income Kentuckians pay a greater share of their incomes in state and local taxes than those at the top. For instance, Kentuckians with the lowest incomes—under $15,000—pay 9.1 percent of their incomes in taxes while the top 1 percent of earners in the state—with an average income of $759,000—pay just 5.7 percent.

That’s largely because the sales tax is a very regressive tax. The lowest-earning 20 percent of Kentuckians pay 5.6 percent of their income in sales and excise taxes, while the top 1 percent pay only 0.8 percent.

There have been recent proposals to enact a state EITC in Kentucky but little movement on the issue in the legislature. As part of his tax reform plan in the 2014 General Assembly, the governor proposed a state EITC of 7.5 percent of the federal credit, half of what the governor’s tax reform commission had previously recommended as part of a package of recommendations to make the tax system fairer and more adequate, among other guiding principles. In the 2014 session, Representative Wayne introduced a bill with a state EITC at 15 percent of the federal credit, while a bill sponsored by Senator McGarvey proposed a 10 percent EITC. The average state EITC across the country is 16 percent.

The new ITEP report shows how states would fare in five different EITC scenarios—for those without a state EITC: a refundable state credit of 16 percent, 20 percent, 30 percent, 40 percent and 50 percent. As seen below, a refundable state EITC at 20 percent of the federal credit would help working Kentuckians with incomes under $15,000 by returning 1.3 percent of their income they now pay in taxes.

 itep 20 percent credit KY

However, as the graph makes clear, a state EITC alone cannot make Kentucky’s tax system progressive. Even a refundable state EITC that is 50 percent of the federal credit would not reduce taxes for the lowest income group to a share equivalent or below that of the highest income group. That’s why we also need progressive tax reforms that ask a little more of those at the top, who are most able to pay taxes and whose incomes have grown dramatically in recent years while many Kentuckians’ wages have been stagnant.

Kentucky Page in ITEP Report

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