ATR applauds Kentucky Governor Matt Bevin’s (R-Ky.) recent decision to veto the state legislature’s budget and tax bills, which included $487 million in tax hikes. The bills, cast as efforts to reform Kentucky’s tax code to encourage business investment, also function as a Trojan horse for net tax increases on small busiensses and consumers. At a time when federal tax reform is beginning to provide long overdue tax relief, now is not the time to erode the benefits of federal tax cuts for Kentucky with net tax hikes.
In his veto message, Governor Bevin argued that Kentucky has an overspending problem, not an under-taxing problem. Bevin stated, “the budget has hundreds of millions of dollars in spending that we can’t really afford to spend.” Bevin further stated it was irresponsible for lawmakers to continue to raise taxes to pay for unnecessary spending.
Further, Bevin pointed out that despite a whopping $487 million tax hike, the budget did not balance. Rather, Bevin urged the legislature to focus on solving the spending problem to avoid these unnecessary tax hikes.
Bevin rightly acknowledged that several components of the bills would bring much needed business investment, increased competitiveness and benefits to Kentucky. For example, the bills would have lowered the corporate rate and individual income tax down to 5%. These important reductions were, however, offset by a 50 cents a pack increase in the excise tax on cigarettes and a major expansion of the sales tax base. Together, these components amounted to a $487 million tax hike.
The cigarette tax increase would have disproportionately harmed lower income Kentuckians. Extensive research demonstrates that cigarette tax hikes don’t reduce smoking and only serve to punish those who choose to smoke. Additionally, these types of tax increases serve to increase illicit sales of cigarettes through smuggling and other criminal activities. It’s not surprising that New York, which has the highest tobacco tax in the nation, also has the highest rate of cigarette smuggling.
As a result of federal tax reform, many Kentucky businesses have already increased investments and passed along benefits, bonuses, and gains to workers through raises and increased retirement contributions. A list of companies offering tax reform bonuses can be found here.
ATR applauds Governor Bevin’s veto and urges the legislature to consider the harms of net tax increases on Kentucky small businesses, consumers, and taxpayers.