Lexington, Ky. - I am not the most optimistic person in the world when it comes to what is happening economically these days. Businesses are filing for protection under the bankruptcy laws. Banks are teetering near collapse. Making matters worse, less than six months into a two-year budget cycle the state has a projected budget shortfall of almost half a billion dollars.
Doom and gloom is everywhere. So, now what?
Now is our best opportunity to reinvent ourselves. It is time to stop doing things the way we have always done them. I believe that the best way to start reinventing Kentucky is to scrap our existing income tax system, look at what other states are doing better than Kentucky is doing, and use that as a guide to make a better Kentucky.
Yes, I am proposing that we do away with the income tax in Kentucky. No, I have not lost my mind. I want to see the economy improve. I am tired of hearing that Kentucky is a poor state. We are an extremely rich state - - rich in history, rich in resources, and we have a workforce that is rich in ability. Where we are poor is in competitiveness.
As I am writing this, the University of Kentucky football team has not beaten the University of Tennessee for over twenty years. Football is not the only place that Kentucky is losing to the Volunteer State. I have been told more times than I care to count about a meeting between an elected official from Kentucky and a former Tennessee governor during which the governor is purported to have said that when competing against Kentucky to attract new business that Tennessee will win every time because of labor laws and tax policy. Tax policy is one of the biggest factors business looks at when locating a new facility.
Tennessee is not the only state in the nation that understands that a business friendly tax policy is what attracts new jobs. Illinois, Michigan, Massachusetts and Wisconsin have all changed their business tax structures to entice business to locate within their borders. Wisconsin estimated that it could increase its overall employment by over 67,000 jobs when it changed its tax policy in 2003.
My proposal will not only give tax relief to businesses; it will free individuals from Kentucky income taxes as well. Just think, no more filing of a personal state income tax return on April 15.
What about running the state's finances? That one is covered, too. Kentucky needs to include services as part of its sales tax system.
I would like to say that I have found a unique, never-been-thought-of-before idea, but that is not the case. As long ago as at least 1989, Kentucky Governor Wallace Wilkinson considered taxing services. The idea is not new and is one of the things that make Tennessee's tax policy better than Kentucky's tax policy. Instead of initiating a change that has proven to be successful in other states, the legislature relied on the same old approach, and raised the sales tax to 6% in 1990.
When talk first started about eliminating the income tax, people were concerned that the sales tax would have to increase substantially. Yet, by taxing services, we would be able to lower the tax rate from 6% to 5%. That means that when you check out of your favorite big box retailer, you are going to pay less for purchases because the tax rate has decreased.
There are other benefits that individuals will recognize immediately as well. Today your employer is taking about 5% of your paycheck and sending it to the Commonwealth of Kentucky as payment of your income taxes. By eliminating income tax, that money will stay in your check. That is an immediate increase in your take-home pay.
Before you start complaining about paying taxes on services, you need to remember that this proposal totally eliminates the income tax. You will be paying less in sales tax when you go to XYZ-mart. At the end of the day, you will have more of your hard earned dollars in your pocket to spend on goods and services that you need.
There are also benefits to the state. A change in the tax code will result in a more efficient government because there will be one less tax system to administer. Kentucky will benefit from a more consistent income flow, and with a sales tax on services as a revenue source, revenue will grow as our service based economy grows. With no business income tax, Kentucky will also have an economic development incentive that makes Kentucky more competitive with every other state in the nation.
In order to adequately fund our state government, a drastic change in the tax code is needed. Previous efforts at "tweaking" the tax policy have been unsuccessful. By refurbishing our tax code to fit the current needs of our residents, and our government, Kentucky will become a more efficient and economic growth friendly state.
Now is the time to act. Making changes that have proven to be successful in other states to our tax system will improve Kentucky's economy. If we make these changes now, Kentucky will be in a better position to compete with other states, such as Tennessee, during and after this economic downturn.
BR-90 has been pre-filed for consideration by the General Assembly in 2009. The bill may be read at http://www.lrc.ky.gov/record/09RS/HB51.htm
Bill Farmer (R-Lexington) has been a member of the Kentucky General Assembly since 2003.