Kentucky Governor Ernie Fletcher unveiled a far-reaching “tax modernization plan” during a news conference on March 11 in Frankfort. The plan reduces marginal income tax rates, extends the corporate income tax to new entities, and increases or expands a wide range of excise taxes.
Fletcher, a Republican who took office as governor in December, said he will “ask the state’s General Assembly to pass a bipartisan bill that will remove 125,000 low-income individuals from the tax roles while stimulating the state’s economy and creating jobs across the state,” according to the news release from his office.
According to the release, Fletcher’s Jobs and Opportunity Bipartisan Solution for Kentucky (JOBS for Kentucky) is a “revenue-neutral approach.”
“Kentucky has been suffering from a growth deficit for too many years because our current tax system makes it impossible to compete with other states,” Fletcher said. “We have been penalizing job creators for setting up shop here and at the same time rewarding businesses for being based in other states.”
Grover Norquist, president of the Washington, DC-based Americans for Tax Reform, noted Fletcher has signed the group’s “No New Taxes” pledge. “I would like to commend Governor Fletcher on reducing marginal tax rates to make Kentucky’s businesses more competitive as well as resisting the demands of special interests to increase [overall] taxes,” Norquist said.
The JOBS for Kentucky proposal has been introduced in the state House of Representatives by Scott Brinkman (R-Louisville) and Rep. Robert Damron (D-Nicholasville). Among other things, the measure:
- removes from the income tax rolls any family with an income at or below $12,000 per year.
- reduces the top personal income tax rate to 5.68 percent from 6 percent. In future years, the top tax rate will drop to as low as 4 percent as growth in state revenues and jobs reach specific triggering targets.
- provides a three-day sales tax holiday prior to the beginning of the school year, during which all purchases of clothing, school supplies, and computers would be exempt from sales and use tax.
- reduces the maximum corporate income tax rate to 6 percent from 8.25 percent.
- increases the cigarette tax nearly 900 percent, from 3 cents to 29 cents per pack.
- imposes a statewide lodging tax of 1 percent of the room charge.
- broadens the corporate tax base to include limited liability entities.
- eliminates excise taxes and the case tax on alcoholic beverages, replacing them with a revised wholesale tax.
- establishes a communications excise tax of 7.62 percent on cable and satellite television providers.
“Some people mistakenly think tax modernization is just another way to raise revenues through tax increases,” said Fletcher. “Let me be clear: Any growth in revenue for the state will result from economic growth and creation of new jobs, not higher taxes.”
Driven by Economic Growth
Reporters for Cincinnati.com, the Cincinnati Enquirer‘s online edition, accepted Fletcher’s explanation that, under his plan, state revenue growth would come only from economic growth. “Fletcher’s plan is, in fact, driven by a belief that cutting income and business taxes will stimulate economic growth and eventually lead to more state revenue, not less, by creating more taxpayers,” the newspaper reported.
Fletcher’s plan is based on the “dynamic scoring” approach of supply-side economics–an assumption that a change in tax policy will have a broad effect on economic behavior. “Fletcher has taken a page from President Bush in this respect,” noted Cincinnati.com. “Fletcher’s approach is the opposite of ‘static scoring,’ an assumption that a reduction in a given tax will simply yield a reduction in revenues from that tax. No change of behavior is assumed.”
“Static scoring will underestimate the revenues you will get from lowering high tax rates,” said Paul Coomes, a University of Louisville economist who has been following developments in Frankfort. “There certainly will be changes in behavior. The tough part is, how much?”
Coomes said he was enthused by Fletcher’s original plan, which was to slash the top individual income tax rate to 4.9 percent.
“I think Kentucky has a reputation nationally of being a high-tax place. The only way you’re going to change that reputation is to turn the direction of your tax system around in a dramatic way,” Coomes said.
Cutting the income tax rate by more than a percentage point “tells the world you are changing the tax system from one that apparently is there to sort of redistribute a lot of money away from successful people,” Coomes said.
According to Cincinnati.com, politics made it impossible for Fletcher to stick with his 4.9 percent proposal. To attract support for the overall package, he had to scale back some of his proposed tax increases, mainly the cigarette excise tax, which Fletcher first wanted to raise by 40 cents.
John Skorburg is managing editor of Budget & Tax News. His email address is [email protected].