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Governor Fletcher Wants To Triple My State Income Tax!

By Theresa Fritz Camoriano

Kentucky’s new Republican governor, Ernie Fletcher, made the campaign promise that he would not increase taxes.  He promised that any change in the tax code would be “revenue neutral”.  Now, he has released his tax reform proposal, and it includes a 6% sales tax on services, which would be added to the 7.5% income tax we service providers are already paying (6% to the state and 1.5% to the metro government).  As a patent attorney, I am one of the service providers who would be affected by this new tax, and, as I understand the proposal, it would effectively triple my state income tax. Let's say, for example, that I bill clients $100 for my services.  Of that amount, half is used to cover rent, support staff, and other overhead, so my income from that $100 is $50.  Under the current system, I would pay 6% of that amount, or $3.00 in state income tax (and an additional $0.75 to the metro government).  However, under Governor Fletcher's system, there would be an additional 6% charged, not on my income, but on the entire $100 billed for services, which would result in another $6.00 in taxes.  So, my total tax bill for that $100 in services would jump from $3.75 to $9.75.

Of course, this will probably be proposed as a “tax on the rich”, saying that it will apply only to doctors, lawyers, and other “rich” people, but don’t expect it to stop there.  Just as the federal income tax began as a tax on just the richest few and ended up taxing everyone, you can expect that the tax on services also will apply to hair dressers, auto mechanics, chiropractors, house painters, lawn care providers, child care providers, dry cleaners, nurses, engineers, architects, bookkeepers, roofers, handymen, wallpaper hangers, or anyone else who offers services to the public, effectively tripling their state income tax.  Then, of course, it wouldn’t be fair for bookkeepers or lawyers in private practice to pay three times the taxes that are being paid by those who work inside a corporation, so, eventually, to make things “fair”, everyone’s taxes will have to be increased.  If you are an earner of an income and think you will be safe from the increase, don’t bet on it.

We have heard repeatedly that we need to attract and keep “knowledge workers” in Kentucky in order to improve the economy.  Well, as a patent attorney, I am one of those “knowledge workers”, and I can tell you that effectively tripling my state income tax is not attractive to me.  One thing the governor might want to remember about us “knowledge workers” is that we can pick up our brains and our laptops and take them wherever we want.  I like living in Kentucky, but tripling my state income tax might be enough to drive me to another state.  I could just move to a state that is not so punitive, or I could maintain a “satellite office” in Kentucky, where I would show up to meet with clients and do work that does not generate income, but live, do most of my work, and pay most of my taxes in another state.  The net result would be far less tax revenue collected from me in Kentucky – probably not what the good governor has in mind, but that’s how the law of unintended consequences (and the law of plunder) works.   

Of course, other “knowledge workers”, who might otherwise consider moving to Kentucky and generating healthy economic activity in this state, would probably decide to stay away from the state entirely if they realized that they would be paying such astronomical taxes.  Surely, this cannot be how the governor intends to improve the economic situation in our state.

The simple fact is that Medicaid and education costs are out of control and cannot be sustained.  Trying to keep up with those spiraling costs by increasing taxes and further punishing the productive people in this state, who are already overtaxed, will only drive them away and further harm the state’s economy, repeating the kind of disaster we have seen in California.  The only viable long-term solution is to bite the political bullet and get those costs under control for the long term.  Families should be expected to take care of themselves and contribute to their own expenses as much as they possibly can before turning to the taxpayers for help.  Medicaid should require a co-pay from everyone, and Medicaid should implement medical savings accounts in order to introduce an incentive for people to keep their medical costs down. 

As for higher education, college students and their families should be expected to pay at least half of the cost of the education they are getting.  Currently, the taxpayers are paying over ¾ of the cost, with the students being responsible for less than ¼.  If these students and their families are not willing to take out loans or work at least to meet the taxpayers half-way, then maybe they are not very serious about their education.  Surely the taxpayers should not be expected to take this education opportunity more seriously than the people who directly benefit from it.  If students and their families had to pay a higher portion of the cost of a college education, they might stop treating college as a four-year-long party and begin to take serious, challenging courses and actually get an education.  And educated people are what we need in order to improve the economy of this state – not a bunch of party animals who can barely read or spell and who have no marketable skills.  If other states want to continue to tax their workers in order to provide highly subsidized college educations, let them!  When their students finish school, they will want to work in a pleasant, low-tax, business-friendly state; let’s make Kentucky that kind of place.

The so-called “free” education for kindergarten through twelfth grade also must become a much more serious endeavor.  The focus must be on the important, basic skills such as reading and math, rather than on social engineering.  Our daughter is getting an excellent education in a private school for less than 60% of the amount being spent by the public schools for a much poorer quality product.  Obviously, the public schools need some basic changes that will result in higher quality education at lower cost. Here are two suggestions:  

1. Tenure for teachers must end.  Teachers should have to perform a high quality of service or else lose their jobs. Our children deserve no less.  We cannot afford to keep lousy teachers in a classroom, and we cannot afford to continue creating make-work jobs in order to “kick the bad teachers upstairs” so they don’t harm the children.  Our focus must be on educating children, not on protecting the paychecks of bad teachers.  

2. Similarly, students should have to be respectful of their teachers and make an effort to learn or risk being kicked out of school.  Students have no right to disrupt the education of others or to harass teachers.  If students do not care enough about their education to make an effort and to treat their teachers and fellow students with respect, then they should not be in school wasting our tax money. 

As Churchill once said, “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”  We need to recognize that we cannot improve our situation by raising taxes.  We must bring spending under control, especially in the areas of Medicaid and education, which represent the lion's share of state spending and which continue to spiral out of control. 

 Here's a suggestion:  "Voters should lobby their elected officials and candidates to demand budget rules that require supermajority voting for all spending, or perhaps even a simple two-line constitutional amendment that would call for either two-thirds or three-fifths majority vote for all spending bills.  Such measures would make it more difficult for any specific spending proposal to be approved, but would not prevent spending on any program that a clear majority of the American people truly desired." -- Richard Rahn of the Cato Institute

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