Let’s talk about the most in your face and universally disliked tax of all, the personal income tax. Read through the next few paragraphs for the basics, and then consider another option.
Here are the basics on Kentucky personal income tax complied from The Tax Foundation, Bankrate.com and the Kentucky Department of Revenue.
Kentucky's 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.
-- 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.
Nonresidents must pay on that portion of their income attributable to Kentucky sources. Fiduciaries must pay on that portion of income of an estate or trust not distributed on distributable to beneficiaries.
Tax base is the federal adjusted gross income adjusted for differences in Kentucky and federal laws, including US government bond interest, limited pension/retirement income exclusion, Social Security benefits and Railroad Retirement Board benefits and deductions for long-term care and health insurance premiums.
Taxable income is computed by using the standard deduction or Kentucky itemized deductions.
Tax credit included personal credits of $20, child and dependent care, low income, and various business credits.
Kentucky tax returns are due on April 15, or the next business day if that date falls on a weekend or holiday.
The state's maximum pension income exclusion remains at $41,110 for 2008 returns (unchanged from 2007) for filers who are retired from the federal, state or local government or who receive supplemental U.S. Railroad Retirement Board benefits. Under a law enacted last year, the exclusion amount is no longer adjusted annually for inflation.
In 2005, Kentucky's family size tax credit replaced the state's low-income tax credit. Eligibility thresholds have been adjusted for the 2008 tax year: $10,400 for a family of one, $14,000 for a family of two, $17,600 for a family of three and $21,200 for a family of four or more
In previous posts I’ve talked about widening the sales tax to services in order to provide a broader more elastic base for the Revenue Stream for Kentucky government. The major objection to taxing services is the tax is regressive. In other words poorer tax payers pay a higher individual proportion of their income than richer tax payers.
Income tax is a progressive tax. The more you make the higher the percentage you pay. Since the sales tax, the personal income tax and the corporate income tax are the three main sources of revenue for Kentucky government we need a combination of the three to create a functional tax base that is also fair to all off the citizens of the Commonwealth.
Here is my proposal for how we need to change the sales and the personal income tax. I’ll post in the future about how the corporate income tax would fold into this plan and how the 200 other minor taxes apply.
First the sales and use tax needs to be expanded to all goods and services except food bought for preparation and medical expenses. While regressive in nature this would provide the elasticity needed in the tax base.
Second the sales tax rate is lowered to 3 or 4 percent from the current 6 percent.
Third exempt the first $50,000 of income from taxation. According to the United States Census the median family income in 2008 in Kentucky was $41,489 and the median income in the United States was $52,029. This would effectively eliminate the income tax for over half of Kentucky’s households.
Fourth, income from $50,001 to $75,000 would be taxed at 6 percent.
Fifth, income from $75,001 to $100,000 would be taxed at 9 percent.
Sixth, income from $100,001 to $250,000 would be taxed at 12 percent
Seventh, income over $250,001 would be taxed at 15 percent.
There would be no deductions or exemptions.
Admittedly the percentages will need to be tweaked and subsequently reviewed on a regular base to keep the system fair. I don’t have access to the detailed economic forecasts the state budget office has therefore the starting percentages may need to be different.
The combination of widening and lowering the sales and use tax while elminating the income tax for over 50 percent of Kentucky households would put the money in the hands of people who will buy products and services.
Couple this with a more progressive and agressive tax on high income individuals makes the system fair to all taxpayers.