Jason Bailey: ‘Shift and shaft’ fiscal policy proposed by General Assembly doesn’t allow Kentucky to prosper
Indications are that the 2022 Kentucky General Assembly will consider major changes to the state’s tax system. While big proposals are often referred to as “tax reform”, the change itself won’t necessarily make things better – and can easily make them worse.
Across the country, states are taking two distinct paths when it comes to taxes that have profoundly different implications for the well-being of individuals and communities.
One Path makes states’ economies stronger and the quality of life better by strengthening schools, health care, and other basic public investments. These states fund improvements by requiring the wealthy to pay their fair share of taxes. States on the other track increase hardship for working families while further enriching the powerful and corporations. These states cut taxes at the top and pass the losses on to everyone else as investments in education, health care, and other basic services decline.
Kentucky would be wise to take the first path. As the top 1% accumulate massive wealth and corporate profits hit record highs, a dozen states in recent years have passed higher taxes for millionaires. States like Colorado, Maryland, Washington, Oregon and more are also limiting deductions for high-income households, increasing capital gains taxes and closing corporate tax loopholes.
Residents of states that have taken this approach are reaping the benefits: the 9 states with the highest tax rates have experienced faster economic growth over the past decade than states with no income tax. States that adopted millionaire taxes after 2000 experienced equal or greater growth than neighboring states that did not. And a comparison showed Minnesota leapfrogged neighboring Wisconsin after the former raised taxes on those at the top while the latter lowered them.
When states close loopholes and eliminate tax breaks for the rich and well-connected, they are able to invest that money in early childhood education, infrastructure, clean air and water, etc This drives state growth by improving the quality of life, fostering innovation, supporting business creation, and moving money into local communities.
While the first option is the path to prosperity, there is a real risk that the General Assembly is heading in the wrong direction.
In the early 2010s, Maine, Ohio, Wisconsin, Kansas, and North Carolina made deep personal income tax cuts claiming their economies would take off. But the 5 states experienced slower gross domestic product growth than the United States as a whole in the years that followed, and 4 of the 5 states experienced weaker job growth.
The income tax cuts in Kansas were such a failure that the state had to repeal them after 5 years to save its budget-strapped schools. Kentucky would likely find itself in the same boat if policymakers cut our income tax even further. A mere one percentage point cut, from 5 percent to 4 percent, would cost Kentucky’s budget more money than we spend on our entire higher education system: 8 universities and 16 community colleges. Reducing it from 5% to 4.9% would cost more than the state spends on preschool education.
We know we can’t get something for nothing. Schools, roads and other necessities cost money, and if income tax is reduced, that money will have to come from somewhere. This is why states that reduce income and corporate taxes end up increasing sales and other consumption taxes. This upsets the tax system. Sales taxes take a much larger slice of income from the poor and working class — disproportionately from people of color — who must spend all their income on necessities. And it weakens long-term incomes by relying on people whose incomes are stagnating, while cutting taxes on the wealthy, whose incomes are rigged to rise.
If Kentucky were to cut its income tax rate to 4%, it would have to raise the sales tax rate from 6% to 7.4% to make up for lost revenue, according to the Institute on Taxation and Economics. Policy. This would give our state the highest state sales tax in the nation. As a result, the bottom 60% of Kentuckians would pay more taxes, while the top 1% — who earn $1.4 million a year on average — would be the big winners with an annual tax cut. typical $8,731.
The change-and-tree tax policy works as well as the “trickle down economy” that underpins it – that is, not at all. Kentucky should not squander its one-time surplus in a generation and hobble its economy in the future with tax policies that give more of our precious resources to the powerful few.
Jason Bailey is executive director of the Kentucky Center for Economic Policy, www.kypolicy.org.