Some Kentucky legislators looking at expanding sales tax

Two Kentucky newspapers have detailed articles in today's papers (1/17/2010) on efforts of some lawmakers to reduce the regressivity of the state sales by expanding it to cover more personal services and lowering the 6% rate.

The Courier-Journal: "Regressive tax system needs reform" by Al Cross (University of Kentucky) - points out that the sales tax base, which includes very few services, "has failed to keep up with changes in the economy and has become too volatile." He also notes, based on income, that the middle 60% of individuals devote a greater percentage of their income to taxes than do the top 20%. This is probably true in most states and typically due to the many transaction taxes states have, such as sales and excise taxes, that represent a good portion of a low-income person's income but a smaller portion of a higher income individual's income because they have more income to easily cover these taxes that do not tend to increase as one's income goes up - particularly when many types of high-end consumption (such as personal services and entertainment) is tax-exempt.

Note: Data from the US Census Bureau for 2007 indicates the following percentages of income used for state and local taxes for a family of three living in Los Angeles (Table 435):

• Under $20,000 10.8%
• Over $150,000 9.3%

The higher income individuals are paying more total tax dollars, particularly if the state also has an income tax, but the percentages shown above indicate the overall progressivity or regressivity of the state tax system.

Al Cross also notes that the University of Kentucky held a symposium on tax reform on 1/13/2010 (“An Economic Perspective on Kentucky’s Tax Structure”). You can find the presentations here.

Lexington Herald-Leader: "Tax-code reform: service to the state? Economy has changed, goods-only sales tax hasn't kept pace in Ky." by Linda Blackford - also notes the overly regressive nature of the Kentucky sales tax. She notes that State Rep. Jim Wayne wants to educate the public about the need for tax reform. He notes that the Kentucky sales tax base is tied to the 1960s and doesn't address today's consumption which includes a lot of personal services. The story indicates that a possible reform package would not only expand the sales tax to personal services but also lower the rate and perhaps add an Earned Income Tax Credit for low-income workers and reduce the income tax rate on the middle class.

These are just the type of reforms that should be considered in California. The sales tax is growing in inadequacy because we are only taxing consumption of tangible personal property when people, particularly higher income individuals with money to spend, are consuming services, digital items and entertainment which is tax-exempt. That's an odd way to maintain a tax base that is so important to state and local governments. It is also an odd group to provide tax exemptions to. Expansion of the base should be accompanied by a rate reduction for everyone, and depending on what is added (if, for example, it also includes some "necessities of life" such as utilities), a refundable income tax credit for low-income individuals could also be added. While there are reasons to exempt some necessities of life, the reality is that higher-income individuals spend more on these necessities than do lower income individuals and thus get a boon from the exemption (such as no tax on a $30 block of gourmet cheese or the utilities to heat and cool a 6,000 square foot home).

I've written about this many times as have others. For more information, please click here.

I hope that California pursues this tax system modernization effort which could be aided as other states do the same (and some states have already begun bringing their tax systems into the 21st century). One of the presenters (Wildasin) at the Kentucky symposium compared the Kentucky tax system to California's to highlight just how problematic it is!

What do you think?