A Louisville-based Republican-leaning think tank has released their proposal to reform the state’s tax code, as the General Assembly prepares for a promised special session later this year.
The Pegasus Institute has published two separate tax reform plans they say will grow Kentucky’s economy.
“The tax code is the number one way that a state can dictate the direction of its economy,” said Jordan Harris, who authored the study. “While states around us have made decisions that promoted growth, Kentucky’s tax structure has remained an economic burden. The result for our Commonwealth is decades of anemic growth, restricting our production, limiting employment opportunities, and reducing household incomes.”
The first plan from the group is called a 3-3-6 plan. This plan eliminates the progressive income tax and replaces it with a flat rate of 3 percent. Pegasus says the change would give Kentucky the second lowest income tax in the region, behind Tennessee which has no income tax. It also lowers the corporate tax rate to 3 percent, one of the lowest rates in the country.
To make up billions in lost revenue through tax reductions, the plan expands the sales tax. According to the institute the plan would increase the take home wages of the average Kentucky family by nearly $1,000 a year.
“This would leave a need of approximately $2.5 billion in revenue to be gained from expanding the sales and service tax bases. To be safe, the state should calculate for $3 billion in revenue to meet projected needs,” according to the Pegasus report. The graph on the left side of the screen illustrates the areas where the institute calls for sales tax increases.
According to the Kentucky Center for Economic Policy, a left-leaning think tank, a move from a 6 percent income tax on top-earners to a flat 3 percent tax would equal a $2.1 billion hit to revenue, and would lead to a $22,000 tax cut for the richest 1 percent of Kentuckians.
The Pegasus Institute’s second plan explains what would be required to completely eliminate Kentucky’s income tax, which they say, “should be the ultimate objective of state.”
Eliminating the income tax would create a need of $4.5 billion in revenue. Pegasus calls for offsetting that through an expansion of the sales and service taxes. The Kentucky Center for Economic Policy estimates that removing the income tax would equal a $32,000 tax break for the richest 1 percent of Kentuckians.
Among the items Pegasus lists as “tax loopholes” that could be taxed include: groceries, medicine, residential utilities, tombstones and textbooks. Health and business services are also listed as those that could be taxed by the General Assembly.
Lawmakers are expected to be called back to Frankfort in a special session by Gov. Matt Bevin, R-Kentucky, later this year to take on tax and pension reform. Kentucky’s pensions are billions of dollars underfunded, and Bevin has asked lawmakers to put everything on the table in an effort to avoid insolvency in the Kentucky Retirement Systems plans.