Options For Tax Reform In Kentucky Include Tax On Food

Sep 19, 2012

FRANKFORT, Ky.  -- Economic consultants looking for ways to reform Kentucky's tax system offered a variety of options Wednesday that include imposing a sales tax on food and on a variety of services ranging from haircuts to automotive repairs to funerals.

One of those consultants, University of Kentucky economics professor William Hoyt, emphasized that the ideas were only options, not recommendations, for the Governor's Blue Ribbon Commission on Tax Reform to consider.

That commission will make recommendations to Gov. Steve Beshear and lawmakers by Nov. 15 on a tax system overhaul.

"Two basic points come from our analysis of Kentucky's tax system," the economists said in a report to the commission. "A broader tax base is needed so that revenue can keep pace with future economic growth, and changes are needed to improve Kentucky's economic competitiveness."

Lawmakers in Kentucky have been unwilling to tax groceries, and, with few exceptions, they have spared most services.

State Rep. Bill Farmer, R-Lexington, said taxing food and services would be a monumental policy change.

"I think food could be considered a sacred cow," said Farmer, one of the state's leading proponents of tax reform. "But it's a $500 million sacred cow. That's a lot of money."

University of Kentucky economist Michael Childress said the state could face a $1 billion shortfall by 2020 without fundamental tax reforms. He said the state "could find itself at a competitive disadvantage to neighboring states for business growth, retention, and recruitment" without making changes.

Other options noted by the economists include extending the state sales tax to selected services and increasing taxes on pension and retirement income.

The consultants pointed out that some options, including a sales tax on services, could increase the burden on lower-income households. That could be mediated by adopting a state-level earned income tax credit.

Some options, including one that would change the way businesses are taxed, are aimed at making Kentucky more attractive to firms looking to invest in the state.

University of Tennessee economist William Fox, another of the consultants, said Kentucky is at a disadvantage to neighboring states because it relies heavily on personal and corporate income taxes.

A 6 percent tax on services that now go untaxed would bolster state coffers significantly.

The economic consultants reported that a tax on funeral homes and funeral services would generate nearly $19 million a year. A tax on services at beauty salons would generate more than $11 million, and a tax on haircuts at barbershops would generate $410,000.

They said taxing automobile repairs could generate more than $27 million a year.