Some Thoughts on Taxes

Let us talk taxes.  Let me say up front that no one wants to pay taxes, but let’s take a look at what is actually going on. 

First, here are some of the facts on the current state of affairs. Then I have a few suggestions on how to deal the chronic budget problems in Kentucky in a fair manner.

First, from the Kentucky Department of Revenue’s Annual Report for Fiscal Year 2009-2010 (the most recent published report), the Total General Fund Revenue was $8,225,127,620.  Of this amount $3,154,488,000 came from individual income taxes, $237,867,392 came from corporate income taxes, $145,948,432 came from the LLET, and $2,794,057,329 Sales and Use taxes.

Looking at Kentucky’s Personal Tax Rates the personal income tax system consists of six brackets with a top rate of 6% kicking in at $75,000. The top rate is 23rd highest nationally among states levying personal income taxes. Kentucky's 2008 state-level individual income tax collections were $815 per person, which ranked 30th highest nationally.

The rates are:
-- 2 percent on the first $3,000 of taxable income
-- 3 percent on taxable income between $3,001 and $4,000
-- 4 percent on taxable income between $4,001 and $5,000
-- 5 percent on taxable income between $5,001 and $8,000
-- 5.8 percent on taxable income between $8,001 and $75,000
-- 6 percent on taxable income of $75,001 and above.

Kentucky's corporate tax structure consists of three brackets with a top rate of 6%, kicking in at $100,000. Among states levying corporate income taxes, Kentucky's top rate is 35th highest nationally. In 2008, state-level corporate tax collections (excluding local taxes) were $125 per capita, ranking 32nd highest nationally.

Kentucky collected over $8 billion in taxes, however the taxes owed the Commonwealth were really in the $16 billion dollar range. 

Tax breaks of one form or another reduced the amount of revenue by 50 percent.  Breaks such as:  $43 million for a religious theme park; millions in tax breaks to UPS, SpiralEdge, Cardinal Aluminum, others; significant tax breaks such as an exemption of active-duty military pay from the state’s income tax for Kentucky residents; a multi-million dollar subsidy of the coal industry; the list goes on…..

Now let’s look at where the money is going:

2008-2010 Biennium General Fund Appropriations $19.1 Billion ^[24]

Category	Percentage
Education	43.8%
Postsecondary	13.7%
Medicaid	13.3%
Other	11.5%
Criminal Justice System	10.2%
Human Services	7.4%

Obviously if you are going to reduce the amount you spend you have to cut Education.  Over half of the budget goes to education and a lot of that is wasted.  But you are not going to be able to cut education until someone is able to reign in the petty fiefdoms that exist in the over 174 school districts and someone requires full professors to teach more than one class a semester. 

This is a topic for another piece so let’s admit the obvious.  You cannot substantially trim the state budget and the traditional method of short changing the retirement fund and cutting benefits and salaries of state employees is not going to work for much longer.

A couple of other relative facts:

The median household income in Kentucky is about $40,000.00 and small businesses totaled 339,747 in the state in 2008. Of these, 69,175 were employers, and they accounted for 49.2% of private-sector jobs in the state (Table 1). Small firms made up 96.7% of the state’s employers.

So what is the answer?

1.       Revise the individual income tax rates with no tax on earnings below $50,000.  Income over $50,000 will be taxed a graduated rate from 6% to 18%.

2.       No tax on business income less than $250,000.  Income over $250,000 would be taxed at a graduated rate from 6% to 18%. 

3.       Eliminate the Limited Liability Entity Tax (LLET)

4.       Eliminate all tax credits, exemptions, rebates, exclusions, incentives and deductions.  

5.       Reduce the sales tax rate to 4% and expand the sales tax to all services and goods excluding food and medical.

The first three points addresses the need of putting money in the hands of individuals and businesses that will spend the money and jump start the economy in Kentucky.  The first point essentially abolishes the individual income tax for over half the households in Kentucky.

The elimination of the LLET would remove an unfair tax on small business in Kentucky.

Kentucky currently gives away half of all tax revenue in credits, exemptions, rebates, exclusions, incentives and deductions.  Many of these “tax breaks” were enacted by the General Assembly and signed by Governors to curry favor with special interest groups.   There should be no deals for the special interests.  Everyone should pay their fair share.

Reducing the sales tax rate and expanding the tax to services acknowledges the fact that Kentucky has moved from a manufacturing based economy to a service based economy.  Taxes on services would be fair to all Kentuckians.  If you want to rent a stretch limo or hire a tax accountant you should be paying a tax on that service.