Kentucky Can Do Better!
Low Income Families Removed from Kentucky Income Tax: A Report on the 2005 Kentucky General Assembly from KFTC's Balancing the Scales:
Governor’s Revenue Trigger and Tax Break for Wealthy Eliminated; Corporate Loopholes Closed
Individuals and families with
poverty-level incomes will no longer be subject to Kentucky income taxes
thanks to legislation passed by Kentucky General Assembly. The low-income
exemption — one of the top legislative goals of KFTC and the Kentucky
Economic Justice Alliance —became part of the tax reform package
during negotiations in the House. The Senate later accepted that part
of the plan.
“Getting the low-income exemption, that was huge,” said KFTC
Chairperson Janet Tucker. “Eliminating state income taxes for all
households below the poverty level is a big deal,” added Debra Miller
of the Kentucky Youth Advocates, a KEJA partner.
The final tax reform legislation passed by the Kentucky General Assembly also reflected KFTC and KEJA goals in several other key aspects.
- Gov. Fletcher’s tax trigger was removed from the bill
- The income tax rate was not lowered for the wealthiest Kentuckians as pushed by the governor
- Some corporate tax loopholes were closed
KEJA tax reform goals were encompassed in House Bill 276 and House Bill 277, both sponsored by Rep. Jim Wayne of Louisville.
HB 276 was aimed at overhauling the state’s corporate tax structure and stopping losses in revenue due to loopholes. HB 277 sought to update the income tax system by exchanging the what is essentially a flat tax for a progressive income tax while removing Kentuckians living and working below the federal poverty line from the state’s tax roles.
“The key to our contribution was putting positive alternatives for tax reform on the table in a highly visible way,” said KFTC member Steve Boyce. “It was House Bills 276 and 277 that provided the basic material. “Once they were introduced by Jim Wayne and 15-20 legislative cosponsors, we and our KEJA allies talked about them and talked about them and talked about them. We compared and contrasted their various features with aspects the governor’s plan.”
Boyce was one of several KFTC and KEJA members who testified before the House Appropriations and Revenue Committee, once in support of Rep. Wayne’s bills and a second time providing comment and analysis of Gov. Ernie Fletcher’s tax package. No public testimony on the tax package was taken by the Senate. This testimony was backed by dozens of KFTC citizen lobbyists who visited legislators in Frankfort, thousands of phone calls, faxes and letters from a broad network of allies across the state, and the production and distribution of a KEJA Tax Reform Primer to all legislators.
Income Tax Reform
The most sweeping changes were in the personal income tax. The new tax plan removes those living and working below the current federal poverty line from the state income tax roles. It also links this exemption to the federal poverty line for future years. The income tax exemption adjusts according to family size providing additional benefit to children. Income taxes for those making up to 33 percent above the poverty line have also been reduced. This means that an individual making less than $9,500 or a family of four making less than $18,500 will no longer pay state income tax.
“It was good to see the bar for dropping wage earners off the state tax roles raised from Fletcher’s proposed $12,000 to the national poverty line of over $18,000,” said Karen Mattingly. “It illustrates the importance of working long term to get good ideas before lawmakers in Frankfort.”
“KEJA partners and our allies have been demanding a fairer tax system for years. Although the plan that passed is not what we hoped for, the fact that it exempts people below the poverty level from the income tax is a huge victory for us,” added Heather Roe Mahoney, co-director of the Democracy Resource Center, a KEJA partner.
The final package also lowers the income tax for all incomes up to $75,000 to 5.8 percent and taxes all income more than $75,000 at the current 6 percent. The governor had proposed reducing the top income tax rate to 5.45 percent. Under the governor’s proposal, a millionaire in Kentucky would have received a reduction in income tax of more than $5,500. Under the final package, that same millionaire will receive a tax reduction of $134.
“All the KEJA partners can be proud that our messages of fairness and need for revenue resulted in only a very small income tax cut for those with incomes above the poverty line,” said KYA’s Miller. “The legislature reduced the cut [proposed by the governor] and added a new bracket for wealthier Kentuckians” to prevent large revenue losses.
Veteran KFTC lobbyist George Fugate was particularly pleased about this aspect of the final tax package. “The tax was set up based upon high income of $8,000 a year in 1950. It’s been the same way for 50 some years,” Fugate said. “This is a step forward. I think that’s a great thing.”
The Tax Trigger
At the heart of Fletcher’s philosophy of reducing government was a “trigger” designed to automatically reduce income tax rates over the years. Other states with similar triggers have experienced significant revenue losses and cuts in services. Last year, when Fletcher first proposed the trigger, few legislators or media discussed it, and even fewer understood it. The Democracy Resource Center along with KEJA analyzed the trigger and its potential consequences and worked to educate lawmakers and the public ever since.
As a result of this effort, even many members of the governor’s own party wanted nothing to do with it. The trigger was removed early in negotiating process in the House.
Corporate Tax Reform
Both KEJA and the governor proposed eliminating the corporate license tax. KEJA proposed substituting a business activities tax while the governor proposed an alternative minimum tax in its place. Both were designed to make sure that no corporation escaped paying at least some tax on its business activity. Although the alternative minimum tax that was included in the final plan falls short of what KEJA had proposed, legislators did address the problem in a positive way.
KFTC and KEJA also successfully supported the closing of corporate loopholes, particularly with respect to limited liability corporations (LLCs). LLC exemptions were originally intended to protect small businesses, but large corporations have abused the law to avoid paying taxes. This loophole was closed.
Unfortunately, revenue gained by these steps was given back to corporations in the form of a 27% cut in the corporate income tax rate. KEJA opposed this cut and provided research to show that corporate tax cuts did not result in increased jobs, as Fletcher claimed. In fact, the results are sometimes the opposite if the loss of revenue means cuts in educate, infrastructure and other serves that make a community attractive to business.
KFTC's Balancing the Scales: Budget, Tax Plan
Fail to Address Kentucky's Revenue Crisis
The final budget passed by the General Assembly and signed by Governor Ernie Fletcher on March 17 increases Kentucky’s debt and falls short of generating sufficient revenue to meet the needs of education and services within the commonwealth.
“Legislators
used lots of smoke and mirrors to produce a budget that increases spending
in education, Medicaid and other areas at least a little,” pointed
out Debra Miller of Kentucky Youth Advocates. “The real reckoning
will come when they return in 2006 to put together the next budget. All
the one-time money will be gone.”
Legislators increased the cigarette, alcohol and other consumer taxes.
These tax increases will go into effect immediately, but the elimination
of the corporate license tax will occur over the next two years. This
and a raiding of one-time money sources will create a false jump in revenue
of about $100 million in the next year.
But, because of the elimination of the corporate license tax and the cut
in corporate tax rates, state revenues will begin to decrease sharply
within the coming years.
“In terms of revenue, the plan that passed will create real problems
for the state in two years. While it raises over $100 million the first
year, it then begins losing about $40 million a year,” explained
Jason Bailey of the Democracy Resource Center.
“Added to the
fact that the new budget takes on so much new debt that will have to be
paid for, Kentucky will have a very hard time affording important, basic
services like education and health care and will continue to face crisis.”
The new debt includes $2.1 billion in bonds to pay projects across the
state, debt that Kentucky will have to pay over the next 20 years.
While the Legislature passed marginal increases in funding for education
and services, they failed to find long-term sources of revenue that will
continue to meet the ongoing needs of the Commonwealth. This was an effort
to bow to forces outside of Kentucky demanding a budget that raised no
revenues over the long term.
“I have mixed feelings about the General Assembly, the budget and
the tax reform package,” said Jennifer Weeber, KFTC member and long-time
advocate of tax justice. “Mostly, however, I am disappointed.
“While I am thrilled that the income tax bill has been eliminated
for families in poverty, the General Assembly didn’t go far enough
in creating the revenue that Kentucky needs in order to grow. We still
are going to face huge budget shortfalls and we are still going to be
talking about cutting essential services in the future.
“Many Kentuckians may think that we accomplished tax reform and
will be perplexed because they thought that this was taken care of,”
Weeber added.
“I am also disappointed that the taxes on businesses were reduced
so much. Fifteen years ago, businesses and the Chamber of Commerce backed
a plan that created the current tax rate in order to more fully fund education,”
Weeber continued. “While our education system has certainly improved,
we still need the money to keep up our good work and continue to improve.
Our children deserve a solid education and our state needs a well-educated
work force.”
Balancing the Scales is a publication of Kentuckians for the Commonwealth. This article is from Vol 24 No 2, April 4, 2005.