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    Register of the Kentucky Historical Society
    Did you know...that the Register of the Kentucky Historical Society, first printed in 1903, is the oldest peer-reviewed publication dedicated to Kentucky history?Subscribe to the Register (only $40 per year).
  • Progressive Politicians and Taxation Reform
    Posted On: Dec 12, 2016

    Progressive Politicians and Taxation Reform

    The reform of Kentucky’s taxation policies have been discussed since November 1982, all without effective resolution. Today there are two schools of thought on the subject one proposed by Representative Jim Wayne that promotes a more progressive and fairer shifting of some of the burden to the wealthiest Kentuckians, and that of Representative Bill Farmer who wants to do away with the income tax and extend the sales tax to services, taxing consumption rather than income. I will address the issue of taxation policy by presenting five basic questions for consideration.

     On February second of 2013, an article appeared in the Louisville Courier Journal entitled “Majority Opposes Hiking Taxes”. This was reportedly the response of 609 registered voters. One note of caution however was that the reporter failed to mention that this survey was taken by Survey USA, the same entity that predicted on November 5th 2012, that the Presidential race was a dead heat at 48% for each candidate. This simply demonstrates that public information, when now examined, can incorrectly form public opinion. Buyer, beware.

    Question One

    Is tax reform possible in Kentucky?

    Given twenty years of unsuccessful legislation, my first question is “Is Tax Reform Possible in Kentucky? This is as much a question of economics as well as politics. Research reveals that income inequality among wage earners in 2006 mirrors that of 1926. (Piketty and Saez 2006). The CBO estimates that the income growth for the top one percent has risen since 1979 278%, versus 18% for the lowest quintile.

    As reflected in our handout Factoids on Taxes, taxation policy varies from state to state regarding a flat personal tax, deductions on federal incomes taxes, and the lack of a personal income tax. The extended question is where are the investment finances that could offer taxation dollars? The BBC and the Tax for Justice Network estimates that there is between $21 and 32 Trillion dollars in offshore investments world wide. Senator Bernie Sanders describes trillion of investment dollars that are being hidden in Cayman Island accounts. The IRS taxation amnesty program has received responses of more than 29,000 Americans who have been keeping hidden accounts in Switzerland. If these taxable funds continue to be hidden in offshore accounts, then who will be available to be taxed? The answer is the lower income segment of the population, those who must consume, but are there sufficient finances available from this segment, regardless of the morality or fairness of such regressive policies.

    Kentucky’s Blue Ribbon Tax Reform Commission has been charged with evaluating various types of taxes based on five elements: fairness, adequacy, competitiveness, elasticity, and simplicity. (ref. handout) The enclosed form offers an interesting format for a yes or no response on differing taxes. If there is an unquestionable need to meet the one billion additional dollars needed to balance Kentucky’s 2020 budget, which one of these taxation classifications will fill the bill? More basic is the question “Does Kentucky have the financial resources required to meet the 2020 goal?

    In researching the fiscal stability of Kentucky one is faced with the reality that the state is one of the poorest in the nation. Examine Factoid Two. The categories of state median income, pension liability, levels of poverty, disability recipients, annual income levels of less than  $15,000, low GDP, and one has the clear impression of the dire economic challenges that are facing Kentucky. Is it possible for it to meet future financial obligations? Furthermore, what is the total tax distribution difference existing among Kentucky seven taxation groups? Refer to handout. Only five of the Fortune five hundred have their home business offices located in Kentucky.

    Question Two

    “How does Kentucky’s taxation policies compare with its surrounding states?

    The Blue Ribbon Commission presents question as part of its overall examination of taxation reform. What research reveals is that comparisons among bordering state taxation policies are impossible to make. Some have sales taxes, differing levels of property taxes, consumption taxes, etc.. This does not include specific differences in each state’s mineral, transportation, industrial, and educational facilities. Will changes in taxation policies induce companies to change their business location, there does not appear to be any definitive economic evidence. It is simply too difficult to quantify all the complex financial variables.

    Question Three

    What is the Economic Reality of the Arthur Laffer-ALEC study entitled “Rich States, Poor States”?

     This study is now in its fifth edition and is the keystone document used to justify the conservative policies for reducing taxes for wealthier citizens as a means for stimulating investment, productivity, and employment. Dr. Laffer is well know for the Laffer Curve, a non proven theory, that states that higher tax rates are counterproductive and will actually reduce tax revenues. The study also states that given the choice of a lower taxation rate in state A and a higher one in state B, a company will be induced to move to the lower taxed state. The ALEC sponsored study promotes no individual or corporate income tax, no estate tax, no state minimum wage, severe tax and expenditure limitations, limited public services, and the establishment of a so called “right to work” state. In its listing of fifty states, Kentucky ranks 32nd in Economic performance rank, and 39th in economic outlook.

    The critical examination of the Laffer Curve, promoted by ALEC, assumes that reductions of tax levels for the wealthiest will result in economic prosperity. Laffer, at the time of his theoretical formulation, was an economic advisor for President Reagan in turn who used the Curve as the basis for his tax cuts. It has been noted that during its implementation income for the top 1 % doubled while wages for the bottom quintile decreased. A similar condition has prevailed during the decade of the Bush tax cuts which has not seen either an increase in domestic investment or an improvement in earned wages for working class Americans. Supply Side and Trickle Down economics has benefitted venture investors, but it has not produced national economic development, nor has it provided an increase in revenues needed for stimulating consumption, or funding for national and state infrastructure and social services. Dr. Laffer is currently an economic advisor to the Governor of Kansas promoting the elimination of that state’s income tax.

    The main defect of the Laffer-ALEC economic model is that it does not consider other factors that would support broader economic development such as cultural, educational, health, social services, recreational facilities, research, and infrastructure. Developers and their professional staff, as opposed to distant investors, are concerned about these factors before establishing their business in a specific location. This is what the Kentucky Center for Economic Policy terms the “stock of knowledge”. Finance without the human amenities will only lead to staff depletion and rapid relocation. Dedicating public funds in developing the social environment should also be seen as a wise investment for attracting now businesses and taxable revenues.

    What must be said about the Laffer-ALEC rankkng system of the fifty states is that it includes only those measures that favor business investment. Such items as the rate of poverty, the actual wages for employment, employee working conditions, social and cultural amenities, are excluded from their calculations. Also excluded are such factors as geographical location, climate, state natural resources, transportation facilities, institutions of higher learning, and other factors relevant to a state’s total economic and social development. The Laffer Curve has not been compared to the levels of taxation and development in other developed nations, and yet it is assumed to be the differentiating basis for determining the categorization of a state as rich or poor.

    Question 4

    What are the economic resources available in Kentucky?

    It is evident that Kentucky does face economic challenges in its future. What areas might be explored to assure its total development both environmentally and economically? There are several: A) as a transportation hub. Both by its history, geographical location, and existing facilities, Kentucky potentially represents an opportunity for expanding as a hub for transporting materials to nearby major cities, B) as a center for tourism. The introduction of such activities, now measured as twelve billion dollars, have increased income, employment,  and tax revenues, C) as a research triangle for the major universities in an exchange of projects and facilities, D) as a center for Medical research. Kentucky has been prominent in many areas of medical progress, additional businesses in therapy, pharmaceutical businesses, and medical/ surgical services can be developed, E) the hydro-electrical use of existing rivers and dams could provide a clean resource for energy and related development especially in rural areas, F) use of parks and recreational facilities, Kentucky has beautiful parks and lakes that could be further developed through an aggressive promotion and advertisement program, G) in the area of agriculture, This would include equine, vegetable, and even in the future hemp production. The coordination of university research and training facilities, as well as improved transportation facilities would advance the state’s agricultural development.

    Question 5

    What is the role of education in the social-economic development of Kentucky?

    Given the state’s level of academic achievement the challenge of future the technological advances, commonly referred to as SBTC or skilled based technological challenge, presents the question of how Kentucky should face the contrast of finding employment for either highly skilled workers, trained workers, and non-skilled workers? Should there be any set priorities? How will these factors impact the development of educational curriculum? What will be the role of Organize Labor in preparing for the needs of the labor force of the future?              

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