Testimony on HB 318: Tax Reform

Thank you Mr. Chairman and members of the committee. My name is Jason Bailey, and I am Director of the Kentucky Center for Economic Policy.

Three strengths of HB 318:

First, it closes growing holes in our tax system by modernizing it to a changing economy and changing demographics.

The state’s own report identifies 287 tax expenditures that collectively result in about as much lost General Fund revenue as the state takes in each year. The bill begins to address that problem by eliminating deductions that disproportionately benefit the wealthy (as 14 other states do), expanding the sales tax to services in a targeted way, and phasing out the private pension exclusion at higher income levels—an exclusion that currently costs Kentucky $235 million and will cost more as the population ages.

Secondly, HB 318 looks for revenue where the ability to pay has increased the most.

It is among high earners that incomes have grown and federal tax cuts have been the largest. Over the last twenty years, the wealthiest 20 percent of Kentucky families saw their real incomes increase 41 percent on average. The poorest 20 percent of Kentucky families had no statistically significant change in their real incomes over that period.¹ At the same time, the extension of the federal tax cuts that Congress agreed to in December means that the highest-earning five percent of Kentuckians are receiving $1 billion in federal income tax cuts this year.² HB 318 asks more from those who have benefitted the most. But the net result of the bill is not to make Kentucky’s overall tax system progressive, or even flat. It just makes it a little less regressive than it already is.

Those tax increases will be partially subsidized by the federal government. Deductibility means those in the top bracket get a 35 cent federal tax decrease for every $1 increase in state taxes.

Thirdly, HB 318 supports economic recovery in the short-term and economic development in the long-term.

Recovery Act monies go away this summer, while the economy (and therefore revenue) still has a long way to go until it reaches pre-recession strength. In a short time this body will be crafting a new budget for the next biennium; those 22 states that have projected revenues for 2013 are showing continued serious budget shortfalls. If we will be crafting a tight budget in Kentucky as well, we should keep in mind that the strongest positive impacts on the economic recovery come from assistance to middle- and low-income families and from avoiding deep state budget cuts.

In the long run, states like North Carolina, which has grown as much as or more than any other in the South in recent years, have shown that dependence on a robust income tax coupled with adequate public investment can help rather than deter economic development.³ HB 318 supports working families with lower marginal rates and an earned income tax credit. And by better aligning the tax system with future growth in the economy, the bill helps protect the investments Kentucky needs.

I urge you to pick up the conversation that HB 318 advances and lead the state in developing a tax reform package for the 2012 General Assembly that can move us forward.

Thank you for the opportunity to speak.

Testimony on HB 318 Tax Reform