This year’s legislative session arrives amid a season of tax reform in other states with which Kentucky competes for economic growth.
Some of our competitor states take more deliberative approaches that offer Kentucky policymakers sound tax-cutting strategies to consider.
Indiana, for example, is in the midst of an aggressive but years-long effort which began in 2011 when its legislature lowered the state’s corporate income tax rate by 0.5% annually through 2020, and then by a lesser amount in each of the past couple of years.
The result: an already strong economy now roars as the Hoosier State’s corporate rate went from a whopping 8.5% in 2011 to its current 5.25%, and then will drop to 4.9% on July 1.
Since then-Gov. Mitch Daniels signed the law in 2011, voters have remained favorable to the long-term tax-reducing plan, sending two more gubernatorial administrations to Indianapolis who support continuing to tax productivity less and consumption more — demonstrating that bold tax policy can result in favorable political outcomes.
Such positive political results also offer momentum for other types of relief, which Indiana accomplished by passing a five-year phasedown of the individual income tax rate to its current 3.23%.
Indiana’s legislature is considering a proposal to further reduce the individual rate to 3% by 2026 and slash taxes businesses pay on equipment.
By phasing down income tax rates rather than going “cold turkey” with huge, impulsively immediate cuts, Hoosier lawmakers are taking a responsible path toward comprehensive reform, ensuring spending decisions keep pace with less revenues flowing from a particular stream.
Just as important, this method recognizes that reducing burdens on society’s taxpaying producers is the right way to grow government revenues, which also is the best means of filling those government-revenue gaps in the long term.
It’s an approach Kentucky policymakers serious about lowering the high burden on the commonwealth’s taxpayers can emulate to answer unbalanced complaints by naysayers obsessing over “lost revenues” created by cutting tax rates who rarely acknowledge the positive impact conservative economic policies have on growing government revenues.
Policies encouraging growth by taxing actual consumption rather than productivity — a proven formula for growing a state’s tax base — usually result in more coins clanging into government coffers without increasing taxpayers’ burdens.
Not only are such scenarios buoyed by dramatic historical examples, but there are also current developments worth noting.
North Carolina, another of Kentucky’s competitor states, is enjoying record revenues being used to fund capital and infrastructure projects along with a spending list that’s a progressive’s dream, including increasing annual K-12 education spending to a level close to Kentucky’s entire General Fund budget for a year.
Democratic Gov. Roy Cooper seems jubilant about all the spending made possible by years of fiscally conservative tax and budget policies.
These policies have proven so successful that lawmakers’ latest budget includes record amounts of spending and completely phases out the corporate income tax within six years, lowers the personal rate from its current 5.25% to under 4% by 2027 and eliminates the state’s income tax on military pensions.
Kentucky, too, is experiencing record surpluses and will soon get $1.1 billion from Washington by way of the American Rescue Plan Act.
What better time to get started on the Bluegrass State’s own version of true tax reform (not past tax increases misleadingly marketed as pro-growth policies) than when we have $4 billion extra cash on hand?
Using one-time dollars to plug temporary short-term shortfalls resulting from lowering income tax rates seems like one of the best investments the commonwealth could make. It would allow Kentucky to provide needed relief to its taxpayers, who carry heavier tax burdens than their counterparts in many of our competitive states have for decades, if ever.
Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions.