Kentucky Governor Steve Beshear just released a 22-point tax proposal, 20 days into a 60 day legislative session. The plan is a much smaller version of one put together by a 2012 blue ribbon commission on tax reform, which was a tax hike three times the size as the current one. It also comes one the heels of a $45 million gas tax hike he proposed last month.
According to the Governor, his plan raises an additional $210 million in taxes per year. It has three major provisions which raise this revenue:
First, it broadens the base of taxable services subject to the sales tax of 6 percent. It subjects labor for installation, repair and maintenance of personal property to the sales tax. The sales tax is also then expanded to a select few other services bringing the total cost for this tax hike to $280 million per year.
Second, the plan raises the cigarette tax from 60 cents to $1 per pack and taxes e-cigarettes. The Governor projects this will generate $125 million for the state. Unfortunately for Beshear, raising tobacco taxes does not necessarily raise revenue. Take the Illinois example:
In May of 2012 when Illinois raised the cigarette tax by $1-per-pack, nearly doubling the state’s tax rate to $1.98 per pack, the tax delivered $138 million less than expected. What’s more, local small businesses lost tens of thousands of dollars as a direct result as consumers purchasing tobacco across state lines.
To avoid higher cigarette taxes, consumers constantly demonstrate that they are willing to purchase the products in less expensive markets. Additionally, tobacco taxes are an extremely volatile revenue source that prompt future tax hikes. Proponents of cigarette taxes neglect economic realities. To argue that a cigarette tax will increase revenues while decreasing the number of people buying cigarettes is absurd. When prices increase, consumption declines, taking revenue with it.
Additionally, increasing the level of taxation on e-cigarettes is counterintuitive to the concept of reducing the number of smokers in the state. Studies have shown that electronic cigarettes stand to improve health and prevent disease. By choosing to “vape” e-cigs instead of smoking cigarettes, consumers get their nicotine fix without the combustion and smoke — responsible for much of the negative health effects of tobacco cigarettes. It's clear this is simply about money.
Third, the plan reduces pension and retirement income tax breaks for taxpayers, subjecting more of their well-earned and saved income to taxation. This results in $176 million in additional revenue for the state.
Not everything about this plan is ill-conceived. It cuts hundreds of millions of dollars in taxes in a way that would make the state more competitive, if not for the three provisions explained above.
The plan reduces the individual income tax for the middle class ($180 million tax cut) and corporate income tax by one-tenth of one percent ($6 million tax cut), which a step in the right direction but a step that pales in comparison to the historic tax reform package signed into law in North Carolina last year.
It also grants an income tax credit for bourbon distillers ($13 million tax cut), lowers the wholesale taxes on beer, wine and distilled spirits ($16 million tax cut), and changes the formula for income tax for multi-state corporations ($155 million tax cut). Click here for the full list.
If not for the three proposals clearly designed to raise money for more state spending, this wouldn't be a net negative for Kentucky taxpayers. State legislators would be wise to strip the three tax hike provisions out of the proposal and focus on broadening the base and lowering the rates in a revenue neutral way. North Carolina provided a good example on how to do this the right way.