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Don't take the bait

By: Christopher J. Derry

State senators must look long and hard at the bipartisan decision of 96 members of the House to increase taxes on Kentuckians. Representatives swallowed the proposal – hook, line and sinker – that the House version of Gov. Ernie Fletcher’s JOBS for Kentucky initiative will reinvigorate the state’s economy

The governor touts his plan as one that will stimulate economic investment and remove obstacles to job growth. Yet the proposal passed by the House raises more than $133 million in new taxes beginning in July.

Legislators say the initiative preserves its revenue-neutral status because it specifies more than $60 million in counterbalancing tax cuts this year and last, and projects more than $72 million in tax cuts for fiscal years 2006 and 2007.

However, there are plenty of indications that this plan will do anything but achieve its stated goal of jumpstarting Kentucky’s fiscal future. Instead, it:

·                    Reduces Kentuckians’ top individual tax rate from 6 percent to 5.8 percent. This miniscule cutback solicits only yawns from outside companies whereas a larger tax cut would bring new jobs to Kentucky. By denying tax relief for families whose incomes exceed $75,000, the plan also ensures that U-Hauls full of furniture won’t be crossing from Tennessee into Kentucky.

·                    Produces a corporate income tax on entrepreneurs that reverses a promise made to them just a few years ago. In 1994, the legislature established limited liability corporations that would pass income untaxed at the corporate level directly to the owners’ individual tax returns. This plan reverses that pledge and applies a minimum tax of $250 – a hefty increase from the $30 minimum charge previously applied.

·                    Slips a new Gross Receipts Tax (GRT) into the state’s tax code. As a result, Kentucky will now levy a tax on businesses that do not even produce a profit. Obviously, legislators don’t understand the negative impact that such a tax has had in other states. With more than 50 percent of Kentuckians living in counties that border surrounding states, this plan delivers explicit directions as to which side produces the higher tax burden.

·                    Removes 300,000 Kentuckians from the tax rolls. Low-income families that qualify for an earned income credit on their federal tax returns receive a handsome rebate from the federal government. This more than pays the small amount of Kentucky income taxes these families must currently hand over. By placing their tax burden upon more productive Kentuckians, this enables politicians to “feel their pain.” How does excluding people from tax rolls yield more jobs?

·                    Sneaks into the tax code new ways of raising taxes on all Kentuckians. Instead of initiating a sales tax on customers who buy alcohol, it raises the tax on wholesalers who then sell it at a higher price to retailers. Another provision gives school districts that experience an above-average influx of students the right to arbitrarily raise property taxes on local residents without a vote.

·                    Eradicates the governor’s tax-reduction trigger. This proven device automatically reduces the personal income tax rates of all Kentuckians if tax receipts exceed inflation and population growth in future years. This trigger delivers Fletcher’s personal guarantee to Kentuckians of his intent to genuinely reduce their taxes. By approving a plan without such protection for taxpayers, policymakers admit they intend to raise taxes on Kentuckians so they can spend it.

Instead, Kentucky’s state senators should forge a new plan that truly signals Kentucky is open to new business. Senate President David Williams should champion legislation that:

·                    Refuses to tax businesses that don’t earn profits. This increases the likelihood that entrepreneurs will not bring more jobs to Kentucky.

·                    Discontinues handing out corporate welfare. Excluding taxes on certain business groups because they use soybeans to make diesel fuel or more efficiently burn coal is simply bad tax policy.

·                    Stops excluding specified groups from the Kentucky sales tax. Efficiently collected by retailers, legislators should broaden this tax to include all products that Kentuckians buy. Paid only by people who have money to spend, an expanded sales tax will raise more than $2 billion in new tax receipts.

·                    Slashes the personal income taxes of all Kentuckians from 6 to 3 percent, and restores the tax-reduction trigger back into the governor’s plan. These two provisions will save Kentuckians nearly $2 billion in income taxes every year.

If you want to catch fish, put something juicy on the hook. The plan passed by the House ensures that Kentucky job-seekers won’t have anything to show but empty stringers.

– Christopher J. Derry is president of the Bluegrass Institute, Kentucky’s free-market think tank.

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