(The Center Square) – A report released this week by the Tax Foundation says Kentucky still lags the country in terms of economic growth, but there is a “unique opportunity” for the state to attract new workers thanks to the rise of virtual offices and working.
To take advantage of the opportunity, however, the public policy group said Kentucky must continue to reform its tax policies – a move that began in 2018 – to promote growth in personal and business income.
“Kentucky is expected to experience robust income growth over the next several years, which represents a valuable opportunity for policymakers to pursue reforms,” ââthe report’s summary said. “Ultimately, the goal of tax reform should be to enable state and local governments to generate sufficient revenue to fund government services in a way that avoids hampering business productivity, business growth, etc. employment and personal wage growth. “
The foundation’s 78-page report came out on Tuesday.
The Tax Foundation’s recommendations include the repeal of the Limited Liability Entity Tax. The group says the gross revenue tax presents challenges for start-ups and those that operate on low margins or lose money. The state should also reduce corporate and personal income taxes, especially since businesses and workers also pay local taxes and professional fees. Removing the inventory tax would also help businesses.
To counter these reductions, the Tax Foundation encourages Kentucky to “modernize” and put more emphasis on use and consumption taxes. This would include the possibility of increasing the state’s sales tax by 6% and giving cities and counties the option of adding a sales tax as well.
Among its neighboring states, only Virginia’s average combined sales tax rate of 5.75% is lower than Kentucky’s 6%. While the 2018 reforms broadened the sales tax to cover additional services, the rate has not changed for over 30 years.
“If a rate hike offsets cuts in income tax rates, it could leave Kentucky with a competitive sales tax rate against its regional rivals while still offering an envious tax rate that would have an effect. most importantly on economic growth and opportunities, âthe report said.
Prior to reforms passed by the Republican-led General Assembly in 2018, the Tax Foundation ranked Kentucky 36th nationally for its business tax climate. In its 2021 report released last month, Kentucky came in 19th, one place behind neighboring Tennessee.
Tennessee, which has no personal income tax and relies heavily on sales taxes, is often touted as a model for Kentucky’s tax reform efforts. The foundation’s report says that over the past two decades, Tennessee’s economy has grown 60 percent faster than Kentucky’s.
Adjusted for inflation, “the gross product of the state of Tennessee grew by almost 36% between 2001 and 2020, while the economy of Kentucky grew at a much more modest rate of 22%, although Below the national average of 35% growth for the period, âthe report said.
In a press conference Monday with other members of the Republican leadership of the State Senate, State Senator Mike Wilson, R-Bowling Green, said there had been discussions of ” high level âon further reforms.
Any tax bill should start in the state House of Representatives.
“There is nothing concrete about it, but I’m sure we would all like to see ourselves move more towards a consumption-based tax and less towards an income tax,” said Wilson, the whip of the majority. “
The Tax Foundation received a grant from the Kentucky Chamber of Commerce to assist with its independent research and report development. “Can we get to where Tennessee is?” It would be very difficult, but then again, maybe we could get to a place like Indiana in their model.
According to the Tax Foundation report, Indiana’s top marginal corporate tax rate of 4.9% is almost comparable to Kentucky’s 5% rate. Indiana’s top marginal personal income tax rate is 3.23%, while Kentucky’s is 5%. Indiana’s average effective local income tax is 0.5%, nearly one-third of Kentucky’s effective rate of 1.4%.
Indiana also has a 7% state sales tax and, like Kentucky, does not allow cities or counties to add to this.
The foundation’s report was independently researched and written with a grant from the Kentucky Chamber of Commerce.
Kentucky Chamber CEO Ashli ââWatts said in a statement that the national nonprofit group’s report presents “critical data, valuable context and a unique national perspective” on how leaders of the States can tackle pro-growth reforms.