Cutting off our noses to spite our Kentucky faces

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“Cutting off one’s nose to spite one’s face” is an expression used to describe a needlessly self-destructive over-reaction to a problem.

In the 1796 edition of Francis Grose’s Classical Dictionary of the Vulgar Tongue, “He cut off his nose to be revenged of his face” is said to apply to “one who, to be revenged on his neighbor, has materially injured himself.”

The expression has become a blanket term for self-destructive actions. For example, if a man was angered by his wife, he might burn down their house to punish her; however, burning down her house would also mean burning down his, along with all their possessions.

Jason Bailey of the The Kentucky Center on Economic Policy has analyzed the current KY legislative tax reform proposals, which will probably have the same effect on Kentuckians that the revengeful husband had on his wife and himself.

The two paths states are taking on taxes

Around the country, states are taking two distinct paths when it comes to taxes that have profoundly different implications for the well-being of their citizens.

The first path makes state economies stronger, and quality of life better,1 by strengthening schools, health care, and other core public investments. Those states fund improvements by requiring the wealthy to pay their fair share of taxes.

Adam Smith, the father of capitalism, stated, “It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

States on the other path increase hardship for working families while further enriching the wealthy and corporations. Those states cut taxes at the top and shift the losses over to everyone else as investments in education, health care, and other core services radically fall short.

Kentucky would be wise to take the first path. While the top 1% are raking in massive wealth and corporate profits are reaching record highs, a dozen states have enacted higher taxes on millionaires. States like Colorado, Maryland, Washington, Oregon, and more are also limiting deductions for high-income households, increasing taxes on capital gains, and closing corporate tax loopholes.

The states with the highest top income tax rates have had faster economic growth over the last decade than the states with no income taxes at all. States that enacted millionaires’ taxes after 2000 had growth that equaled or exceeded nearby states who did not. And one comparison showed that Minnesota outperformed next-door neighbor Wisconsin after the former increased taxes on those at the top while the latter cut them.

When states close loopholes and eliminate tax breaks for the wealthy and well-connected, they can put that money into early childhood education, infrastructure, clean air and water, and more. That spurs state growth by improving quality of life, fostering innovation, supporting business formation, and circulating dollars in local communities.

While the first option is the path to prosperity, the Republican-dominated KY General Assembly stubbornly is determined to race in the wrong direction, pleasing their donor class and corporations to the detriment of the Commonwealth.

The cautionary tale

In the early 2010s, Maine, Ohio, Wisconsin, Kansas, and North Carolina made big cuts to individual income taxes with claims their economies would take off. But all 5 states saw slower growth in the years after, and 4 of the 5 states had weaker job growth.

Income tax cuts in Kansas were such a failure that the state famously had to repeal them after 5 years to save its budget-starved schools and avoid bankruptcy.

As for Kentucky, “Just a one percentage point reduction in the income tax, from 5% to 4%, would cost Kentucky’s budget more money than we spend on our entire system of higher education - 8 universities and 16 community colleges. Cutting it from 5% to 4.9% would cost more than the state spends on preschool,” analyzes the KY Center for Economic Policy.

Schools, roads, and other necessities cost money, and if the income tax is cut, that money will have to come from somewhere. That’s why states that cut income and corporate taxes end up raising sales and other consumption taxes.

Sales taxes, a regressive tax,  take a much bigger share of the incomes of the working class who must spend all their incomes on necessities. And it weakens revenue in the long run by relying on people whose incomes are stagnant, while cutting taxes for wealthy people, whose incomes grow.

Additionally, the Ky Center for Economic Policy reports, “If Kentucky were to cut its income tax rate to 4%, it would have to raise the sales tax rate from 6% to 7.4% to make up the lost revenue, according to the Institute on Taxation and Economic Policy. That would give our state the highest state sales tax in the country. The bottom 60% of Kentuckians would pay more in taxes as a result while the richest 1% — who make $1.4 million a year on average — would be the big winners with a typical annual tax cut of $8,731.”

This is being called a shift and shaft tax policy – shift the money to the wealthy, and shaft the poor, working families, and the middle class!

Shift and shaft tax policy works about as well as the habitually failed Republican “trickle-down economics” that underlie it. Kentucky shouldn’t squander its once-in-a-generation surplus, and hinder its economy in the future, with tax policies that give more of our precious resources to the powerful few.

“House Bill 8 is the most fiscally destructive legislation ever considered in the commonwealth. It tries to get something for nothing by phasing out the income tax, which generates 40% of state revenue, without providing a way to pay for it,” according to Jason Bailey of the KY Center for Economic Policy.

Bailey sounds the alarm, “The bill digs a hole that will get much deeper over time, making it impossible for Kentucky to meet the constitutional mandates for a balanced budget and adequately funded public schools, among other obligations. It gives a huge tax cut to the wealthy and leaves a ‘magic asterisk’ as to how we’ll fix the massive damage that results.”

“KY House Bill 8 begins with a 20% cut in our income tax rate, from 5% to 4%. That cut alone will cost more than Kentucky spends on all its universities and community colleges combined, and exceeds what the House set aside from the current surplus for one-time tax refunds. It then includes triggers to cut the tax rate by another 0.5 percentage points each time revenue exceeds arbitrary dollar levels, until the income tax is eliminated,” continues Mr. Bailey.

HB 8 doesn’t even try to replace the lost revenue by abolishing our largest source – the income tax. It includes new taxes on an obscure list of services including security systems, event planning, taxis and ride-sharing services, and electric and hybrid vehicles. But those taxes raise just 10% of what we lose from the first reduction in the income tax alone, making them more a distraction than a solution.

The net result is a hole in our budget the size of what Kentucky spends on the entire Medicaid program, which provides health care to 1.5 million kids, seniors, low-income people, and Kentuckians with disabilities – about 35% of our population. And the hole just gets much bigger from there.

When the other shoe drops, we’ll be forced to slash services dramatically, meaning laid-off teachers and social workers, worsening health crises, soaring student loan debt, and much more.

There will be pressure to raise the regressive sales tax to fill the gap, and tax purchases like groceries, prescription drugs, and utilities. BTW, HB 8 is designed for those increases to trigger additional income tax cuts, failing to raise new revenue while constituting a shift in which low- and middle-income people will pay more in taxes.

Wealthy Kentuckians will be the only winners

A total of 65% of the tax cuts will go to the richest 20% of people, and 37% will go to the richest 5%, according to the Institute on Taxation and Economic Policy. The top 1% of Kentuckians will get $11,000 in tax cuts starting the first year and $55,000 annually when the income tax is eliminated. Shameful for such a poor state.

It’s a mistake to think the “growth fairy” will reward Kentucky for HB 8 with jobs and population. That same “growth fairy” wreaked havoc in Kansas, which had to roll back its income tax cuts after just five years when they created a budget crisis. Arizona, North Carolina, Ohio, Maine, and Wisconsin also cut their income taxes at the same time and had to make budget reductions after their economies grew slower than the national average.

Because Kentucky has a temporary budget surplus caused by federal aid, the day of reckoning on HB 8 will not happen this biennium. But the tab from eliminating 40% of our revenue will come due, and it’s huge. We could see shuttered schools, hospitals, state parks and childcare centers; a sicker population unable to get the help they need; and basic systems we all rely on that are completely unable to function.

On the Senate floor, Republican Sen. Damon Thayer of Georgetown said Democrats would spend all the budget surplus if it was up to them.

“Just because we have a surplus doesn’t mean we have to spend it all,” Thayer said. “We must remember where this money comes from. It comes from the taxpayers; it comes from the hard-working people of Kentucky.” Most of this surplus will be given to the wealthy in the form of lower taxes.

It would be dishonest to think that KY earned this surplus, and that the wealthy are somehow overtaxed.

KY is notoriously a welfare state receiving much more $ from the feds than it pays in.

Sen. Chris McDaniel, a Republican and chair of the Senate budget committee, disputed that the bill would be a giveaway to the state’s top earners.

“When I hear the conversation about tax cuts for the wealthiest, I simply have to cringe at that misnomer because the income tax that’s reflected in House Bill 8 is an equal reduction for all taxpayers,” McDaniel said. What??

“This dual assault on the state’s revenue and public programs points Kentucky in the wrong direction. Cutting income tax rates won’t boost Kentucky’s economy or attract new residents. Low tax rates don’t meaningfully influence people to move across state lines, and Kentucky’s taxes are already quite low. Kentucky’s flat 5 percent income tax rate is already lower than or equal to that of 28 other states, and per-capita combined state and local taxes in Kentucky in 2019 were $4,198, the tenth lowest in the country,” writes Cortney Sanders, of the Center of Budget and Policy Priorities.

Sanders surmises, “Kentucky is being held back by its legacy of disinvestment in public services that help communities thrive. A well-educated population, for example, has been linked to higher earnings and lower unemployment — in Kentucky and nationwide — yet the state has the sixth-lowest number of high school diploma holders and fourth-lowest number of bachelor’s degree holders in the country. And, a rich body of research finds that policies that provide economic and health security, such as low-income tax credits, food assistance, and affordable health coverage, can help states prosper, in part by removing barriers to economic participation.” (The Center on Budget and Policy Priorities)

Kentuckians need the Republican-dominated General Assembly to be fiscally responsible with this surplus to protect our investments in education, health care and other needs from being ravaged by lower taxes on the wealthy.

Will the Republican party pass a tax cut that burns down the houses of the poor, the working class, and even the middle class, while at the same time making their houses even bigger? And in the end, will the Republicans realize that in starving the state of revenue, thus ruining the very place they live, they have cut off their nose to spite their face?

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Written by John James Alexander, a pseudonym for a long-time Kentucky educator.

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