The Income Tax Was Never Going to Be Eliminated. But Admitting So Matters.

Republished from Kentucky Center for Economic Policy

An important shift may have happened last month when the Kentucky House Speaker said the General Assembly will not be eliminating the state’s individual income tax after all, as reported in the Lexington Herald-Leader.

For decades, Republican lawmakers have made complete elimination of the state income tax one of their top goals. So why abandon it now that they’ve put a law in place to phase it out and won the huge supermajorities needed to follow through? Because on this issue, the rhetoric was on a crash course with reality.

Getting anywhere close to eliminating the state’s largest revenue source would be a political and fiscal disaster. Legislators would be voting to lay off teachers, shutter hospitals and let infrastructure crumble. Alaska is the one state to ever end its income tax, and it did so only after striking oil.

Nevertheless, the March to Zero on the income tax has long had its boosters. Some think cutting the tax is politically popular, but that notion has lost steam. There were no rallies in Frankfort celebrating the half-point income tax cuts of the last few years, which were costly for the state but too small for most individuals to even notice. And voters increasingly believe — accurately — that tax cuts are rigged to the wealthy and powerful. Witness the lack of public excitement about the 2017 federal tax reductions.

For others, supporting tax cuts is ideological. But those interests have relied on a have-your-cake-and-eat-it-too economic theory that has been debunked everywhere it’s been tried.

People like Arthur Laffer, who came to Kentucky in 2017 to tout his trickle-down philosophy, claim tax cuts will pay for themselves in the resulting economic growth. George H. W. Bush rightly labeled that notion “voodoo economics.” Most recently Kansas had to reverse course when it followed Laffer’s advice and cut income taxes too deeply. Some Kentucky legislative leaders may no longer buy the idea that the growth fairy will make it all work out.

The recent attempt to eliminate Kentucky’s income tax faced immediate missteps. Lawmakers tried to give their tax-cutting decisions a rational justification by establishing a trigger formula that included one-year benchmarks for spending and saving before permanent cuts could be made.

But the triggers were missed the first year the mechanism was in effect despite a very strong economy. Proponents said it was “working exactly as intended,” but then in 2024 legislators moved the law’s goalposts to try hitting the triggers with rule changes that ignored spending with money parked in the Budget Reserve Trust Fund. And now the House Speaker and perhaps others are disavowing the goal of a 0% income tax after only having put it in law in 2023.

A few extremists might want the General Assembly to get closer to 0% by dramatically increasing the sales tax and applying it to exempt items like food and groceries, but Speaker Osborne cast doubt on that notion to the Herald-Leader. Paying for income tax cuts that go primarily to the wealthy by raising taxes on goods and services families need is another political dead end.

The likely abandonment of the March to Zero is a refreshing reminder that most of us can agree on the important role taxes play. From funding education to health care to supporting the most vulnerable, they are essential to a good society.

To be sure, there’s already serious damage coming from the reduction in the income tax rate from 6% to 4%. These harms are already starting to emerge, and will worsen when the economy inevitably weakens and get much deeper if lawmakers drop the income tax rate to 3% over the next couple of years, as the article suggested.

It’s likely at some point — perhaps far in the future — Kentucky will reverse course and restore a graduated income tax as was first established during the Great Depression and like most states have in place today. Such a system works because it asks more of those who have more and generates the revenue needed for the public investments that benefit us all.

Until then, we can take comfort that the ideological edifice that claims we can do without taxes, and that more giveaways to the wealthy will grow our economy, is starting to teeter. It’s only a matter of time before a new one is built.

This column was published by the Lexington Herald-Leader on June 5.

The post The Income Tax Was Never Going to Be Eliminated. But Admitting So Matters. appeared first on Kentucky Center for Economic Policy.

Republished from Kentucky Center for Economic Policy