UK Experts Issue Report to State Tax Reform Task Force

LEXINGTON, Ky. (Sept. 19, 2012) — The economic consultant team that includes two experts from the University of Kentucky delivered its final report to the Governor’s Blue Ribbon Commission on Tax Reform today.  The Governor’s Office engaged the three-person team of William Hoyt and Michael Childress of UK, and William Fox of the University of Tennessee to assist the 23-member tax reform commission in studying how to improve the state’s tax structure.

Hoyt, a longtime economics professor at UK, is the chair of the university's Department of Economics.  Childress is with the Center for Business and Economic Research (CBER) in UK’s Gatton College of Business and Economics and previously served as executive director of the Kentucky Long-Term Policy Research Center.  Fox is a professor in the Department of Economics at the University of Tennessee and the director of UT's Center for Business and Economic Research.  He has served as a consultant on finance, taxation, and economic development in a number of states and developing countries.

Chaired by Lt. Gov. Jerry Abramson, the Blue Ribbon Commission on Tax Reform began its work earlier this year and has held a series of public forums around the state seeking public input.  Early in the process Abramson noted the role of the economic consultants would be to “evaluate Kentucky’s tax code as measured by the principles of fairness, competitiveness, simplicity and compliance, elasticity and adequacy.”

The consultant team was tasked with evaluating and summarizing numerous areas of Kentucky’s tax system, as well as reviewing major tax reform efforts in competitor states and how those states addressed the particular principles the Kentucky commission has been instructed to uphold.

The team was also asked to review and summarize the current burdens of taxation and compare the respective burden on individuals and corporations to competitor states, while evaluating the responsiveness of Kentucky’s tax code to changes in the economy.

"Two basic points come from our analysis of Kentucky’s tax system: a broader tax base is needed so that revenue can keep pace with future economic growth, and changes are needed to improve Kentucky’s economic competitiveness,” Hoyt said.

Childress noted that “without fundamental reforms Kentucky could face a $1 billion shortfall by 2020, and could find itself at a competitive disadvantage to neighboring states for business growth, retention, and recruitment.” 

“The options for improving the state tax structure,” said Fox, “are based on two core ideas — broadening the tax base will make the system more elastic, and shifting taxation away from business capital and labor earnings, and toward consumption, will make it more competitive.”

The consultant team provides several options that can improve future revenue growth and economic competitiveness — which are evaluated with respect to other important factors, such as fairness and simplicity. The consultants’ advice to the commission is to “view these options as alternative routes to a different tax system, but with varying implications for adequacy, elasticity, competitiveness, fairness, and simplicity.” 

Some of the “base broadening” options include extending the state sales tax to selected services and increasing taxes on pension and retirement income.  However, the consultants are quick to note that “it is not our intention to suggest that adoption of these base-broadening measures necessarily means that revenues need to increase. An alternative might be to adopt base-broadening measures in conjunction with reductions in tax rates.” 

The consultants also provide an analysis showing that certain options — such as a sales tax on some services — would increase the tax burden on lower-income households.  This additional tax burden could be lightened by adopting additional measures, such as a State Earned Income Tax Credit.  This example makes an important point, according to the consultants, about the principle of fairness — which is being examined by the commission.  “Fairness,” according to the consultants, “is best evaluated by examining the entire tax system and not by an evaluation of each individual tax.”

The consultants also provide numerous options for changing the way businesses are taxed in Kentucky.  Professors Hoyt and Fox explain that these options are designed to “increase Kentucky’s competitive position by making it more attractive for firms to locate and invest here.”

The Commission on Tax Reform will use the report to formulate its final recommendations to Governor Beshear by Nov. 15.  The economic consultant team will continue to assist the commission as it develops its final report.

The full report is available on the CBER Web site at cber.uky.edu.

MEDIA CONTACT:  Carl Nathe, (859) 257-3200; carl.nathe@uky.edu; Michele Sparks, (859) 257-0040; michelesparks@uky.edu