A Tale Of Two Tax Studies

Apr 6, 2018

Dueling reports on the tax overhaul approved by the Kentucky General Assembly this week are adding fuel to the still-smoldering debate over the bill.

Credit Josh James / WUKY

GOP leaders contend the tax plan, House Bill 366, simplifies an antiquated tax code and promises a more business-friendly commonwealth by dialing back corporate and individual income tax rates to a flat 5 percent in concert with new sales tax on more than a dozen services, including auto repair, dry cleaning, and landscaping.

For a more favorable take on the fast-tracked tax legislation, House Speaker Pro Tem David Osborne cites a study posted by Jared Walczak with the conservative-leaning Tax Foundation. Were the reforms already a reality, the senior policy analyst projects that Kentucky would climb from 33rd to 18th in their State Business Tax Climate Index, which measures "tax structure and rewards simple, neutral, stable, and transparent tax codes."

"If you have to raise taxes, which is looks like Kentucky has to do, then it makes sense to try to get as much reform as possible," he tells WUKY. "Right now, we're still seeing this back and forth on whether this is enough, but it's certainly a step in the right direction."

As test cases, Walczak points to North Carolina and Indiana, which improved their standing on the think tank's index by enacting similar reforms. The former, he notes, has witnessed better-than-projected revenue intake every quarter since their tax system overhaul. 

"Right now, there's a real opportunity. Federal tax reform does mean that there's going to be more domestic investment because it incentivizes domestic investment. The question is where," Walczak says. "So Kentucky and 49 other states are competing for that investment. Simplifying the tax code, bringing rates down a bit, and most importantly not trying to pick a particular industry but having a competitive environment for all comers is going to be important."

Where Walczak sees a more even playing field for business with the government backing away from picking "winners and losers," opponents say one group clearly comes out on the bottom: low-income Kentuckians.

An analysis by the left-leaning Institute for Taxation and Economic Policy shows the bill overwhelmingly favoring earners in the top tax brackets.

"This is a complicated tax plan with a lot of moving pieces, but the net result is clear: that is is middle class tax hike. Kentucky's poorest families and the middle class will end up paying more while the state wealthiest taxpayers are going to end up paying less," ITEP analyst Aidan Davis says.

According to the study, the richest 1 percent of Kentuckians, making an average of $1,042,000 a year, will take home an average tax cut of $7,086 while the those in the lowest 20 percent would see an average tax increase of a little more than $90. Davis says it's an experiment that has so far failed in states where it's been tried.

"Across the country, tax cuts for the rich have fallen short as an economic development strategy over and over again," she argues. "We've actually seen this play out in states like Kansas and Oklahoma, where lawmakers really came to regret relying on these top-heavy tax cuts to boost their economy."

The future of HB 366 hinges on decisions made in the waning days of the 2018 legislative session, as Gov. Matt Bevin considers whether to veto or sign the bill. Should he reach for the red pen, the General Assembly has two remaining working days to override a veto.