The Kentucky legislature passed a sweeping tax overhaul this week, and now lawmakers are asking Gov. Matt Bevin to sign a bill that would slash taxes for some corporations and wealthy individuals while raising them on 95 percent of state residents, according to a new analysis.
The proposal arrives on the Republican governor's desk at a charged moment in Kentucky politics: The bill flew through the legislature on short notice, and thousands of teachers went to the State Capitol building earlier this week to protest cuts to their pension system.
Bevin's position on the tax overhaul, Kentucky's biggest in more than a decade, remains unknown. He said in a statement that the bill and the state budget, which was also passed by the legislature and is awaiting his signature, may not be “fiscally responsible.” Bevin has until April 13 to sign or veto the bill or send it back to the legislature with modifications.
The plan would flatten Kentucky's corporate and personal income-tax rates, setting both at 5 percent. Currently, Kentucky's corporate tax rate runs between 4 and 6 percent, while its income-tax rate ranges from 2 to 6 percent. The new flat rate of 5 percent for everyone means that small companies and Kentuckians with below-average incomes will face tax hikes, and higher earners will get tax cuts.
The bill attempts to make up for those cuts by nearly doubling the cigarette tax and imposing sales taxes on 17 additional services, including landscaping, janitorial work, golf courses and pet grooming. The state's nonpartisan legislative staff estimated the plan will, on net, raise money, although other experts are skeptical.
Residents of Kentucky, like everyone else in the country, are also affected by the federal GOP tax law passed in December. The Kentucky plan shares some characteristics of that overhaul, including the proposal to lower taxes faced by some businesses. But in contrast with the congressional GOP effort, Kentucky Republicans are aiming to avoid dramatically increasing the deficit.
That is one reason the Kentucky plan includes an expansion of the sales tax, which is expected to hit most state residents. Overall, the plan would give an average $7,000 tax cut to the richest 1 percent of Kentuckians, who average more than $1 million of annual income, according to a report released Wednesday by the nonpartisan Kentucky Center for Economic Policy. But 95 percent of the state's taxpayers would see a tax increase, and those earning between $55,000 and $92,000 a year would face the largest tax increases — about $213 a year, the analysis found.
Meanwhile, someone earning $8 million a year — such as John Calipari, the head coach of the University of Kentucky men's basketball team — would receive a tax cut of close to $80,000 a year, said Jason Bailey, the executive director of the center. As a share of their income, the poorest Kentucky residents would face the biggest tax hikes, in part because of the increase in the cigarette tax, according to Bailey.
The plan would generate an additional $239 million in state revenue in 2019 and an extra $248 million in 2020, according to the legislature's nonpartisan scorekeeper.
Bevin's office did not reply to a request for comment.
Several Republican states have passed similar tax overhauls since the tea party wave of 2010, according to Richard C. Auxier, an analyst at the Tax Policy Center. But Kentucky's effort does not assume the steep cuts will generate enough economic growth to pay for themselves, as the Kansas and Oklahoma tax overhauls did, Auxier said. Instead, as in North Carolina, the Kentucky legislature is trying to raise money for the cuts by broadening the tax base.
“Republican governors want to cut or eliminate corporate and income taxes, and they face a choice: Do you shift that burden to low-income residents with a sales-tax increase, or do you blow a hole in your budget?” Auxier said. “Kentucky is opting for the first approach.”
Some Republican legislators have defended the revenue increases by arguing that the tax plan, which was passed alongside a state budget plan, will allow the state to avoid cuts to the schools while increasing the competitiveness of state businesses. The thousands of Kentucky teachers rallying at the State Capitol on Monday were protesting limits on their sick-leave benefits and smaller pension benefits.
“This plan makes Kentucky more economically competitive while also maintaining our ability to fund vital investments in education,” Kentucky House Majority Leader Jonathan Shell (R) told The Washington Post in a statement. “By lowering rates and eliminating outdated deductions, we are providing the revenue necessary to make the investments we need while also making Kentucky more attractive to industry and job creation.”
Conservative policy analysts have also been broadly supportive. “In essence, this bill is broadening the tax base and lowering rates, which is what sound tax policy looks like,” said Morgan Scarboro, a policy analyst at the Tax Foundation, a right-leaning think tank.
But Democrats are urging Bevin to reject the measure, citing projections that it would raise taxes for low-income Kentuckians.
“This came in at the 11th hour in a 300-page bill that we did not see until the day it arrived,” said state Rep. Angie Hatton (D), who represents a low-income county in eastern Kentucky's coal country. “And it cuts taxes for the rich on the backs of the poor.”
Correction: An earlier version of this post misidentified Shell as the state Senate majority leader. He is the House majority leader.