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A commission appointed to make recommendations to improve Kentucky’s tax code held its third meeting earlier this week in Frankfort. The Governor’s Blue Ribbon Commission on Tax Reform heard from two of its three recently named consultants, Dr. William Hoyt and Michael Childress of the University of Kentucky. Dr. William Fox, a University of Tennessee professor who previously consulted the state on tax reform in 2004, was not present.

Dr. Hoyt told the commission they would provide detailed data comparing Kentucky’s tax system to competing states and how different systems affect employment, location decisions, distribution (i.e. who pays what), and revenue stability. He said they would not determine whether a certain tax is “fair” or how the state should prioritize its spending.

Dr. Paul Coomes of the University of Louisville also testified, emphasizing that 42% of our economic output is concentrated in four counties (Jefferson, Fayette, Boone, and Kenton), three of which are along the Ohio River. He told the commission to be aware of tax changes that could further boost our border states, using the example of how alcohol tax changes in 2005 have caused a steep decline in beer sales in Kentucky.

Dr. Coomes said the state does a poor job of attracting talented workers and headquarters because of its high income taxes, and cautioned that raising taxes will not necessarily generate additional revenue – it could cause businesses and individuals to leave the state. He also said the state’s tax collection system is inefficient and recommended giving local jurisdictions more flexibility in raising revenue, including a local option sales tax.

Another academic, Robert Salyer of Northern Kentucky University, testified that the state should move away from the gross receipts tax because it results in tax pyramiding and is often buried in the sales price of a good.

As in the first two meetings, the commission received testimony from Greg Harkenrider, the state’s chief economist. He discussed some options for reforming tax expenditures, known to many as “loopholes.” He said adding a penny to the sales tax would generate $510 million in additional revenue, noted four expenditures on goods that would generate nearly $1.5 billion, and listed a slew of services that are taxed by other states. Harkenrider also said the state could broaden its income tax base by taxing pensions, capital gains transactions, disability income, and home mortgage interest.

The commission now heads across the state for meetings in each of the six congressional districts, beginning in Paducah on May 29. All meeting information is available on the commission website, which also provides a place for business owners and individuals to make public comments. We strongly encourage business owners to make your voice heard loud and clear to ensure any attempt at tax reform results in a more competitive business climate in Kentucky.

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Ensuring Kentucky’s competitiveness should be a key element of the work of a commission reviewing the state’s tax system, the Kentucky Chamber of Commerce said Tuesday.

“Kentucky has an opportunity, through the work of the governor’s Blue Ribbon Tax Commission, to take a close look at the realities of state taxes and spending and develop a system that will help ensure the long-term sustainability of important government programs while building taxpayers’ confidence in how their money is being spent,” the Chamber said in a statement sent to commission members and other policy leaders.

The Chamber urged the commission to keep several basic points in mind during its work:

• Improving Kentucky’s competitiveness relative to other states is key to building an economy that will produce more tax revenue to fund needed programs.
• State spending must be subject to a close review in light of the fact that spending priorities over the past few decades have shifted toward prisons, pensions and health care and away from investments in education and economic development.
• The state should not overreact to the nation’s worst economic downturn in more than 75 years.
• State spending has grown faster, on average, than the state’s economy over the past 20 years.

The economic growth necessary to produce more tax revenue cannot happen if Kentucky’s employers are put at a disadvantage through tax changes that hamper their ability to expand and create or retain jobs, the statement noted.

But slow state revenue growth in recent years has prompted some calls for higher taxes. “…One point that can get lost in these discussions is that the slowing revenue growth … has been the result of the worst economic downturn the nation has experienced since the Great Depression in the 1930s.” It is doubtful that any tax system could have fully protected Kentucky from the impact of such a recession, the Chamber added.

Citing its research on state spending that began in 2009 with the Leaky Bucket report and continued in 2011 with a follow-up report, the Chamber noted that unsustainable spending in several areas continues to pull money away from investments in education and economic development. Although progress has been made in slowing the spending increases, the growth rate in Medicaid, corrections and public employee health insurance spending continued to outpace that of the overall state budget through fiscal 2012.

“The bottom line: unless this spending is brought under control, it really doesn’t matter how much tax revenue is raised. The ‘leaks’ in the spending budget will ensure that no amount is enough,” the statement said.

The Chamber’s statement took note of two other items:

• Local occupational taxes are putting Kentucky’s major metropolitan areas at a competitive disadvantage with their peer cities in the South. Compared to other states, Kentucky relies too heavily on income taxes at the state and local levels.
• Kentucky ranks 30^th in the nation in the amount of its residents’ personal income that goes to government spending, but Kentuckians earn less than the residents of 43 other states. State government has grown beyond the capacity of citizens and businesses to support it.

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