Kentucky’s tax code should be simple and straightforward to ensure accountability. It should encourage practices that reduce administrative costs for taxpayers through uniform laws and regulations. To spur economic development, it should promote a level and balanced approach for Kentucky businesses.
Sadly, Kentucky’s current tax code is a mess. It is at best, too complicated, and at worst, simply unjust.
In addition, it is not business friendly. A recent study by David Wildasin, a professor at the University of Kentucky’s Martin School of Public Policy, found that 44.3% of all state and local taxes collected in Kentucky were paid by businesses, about ten percent higher than the national average.
Replacing this antiquated code with a system that taxes fairly and equitably while spurring the competitiveness of Kentucky’s businesses should be a primary goal of state government. One specific example of needed reform results from the Franklin County Circuit Court’s ruling in Illinois Tool Works v. Kentucky Revenue Cabinet (“ITW”).
In ITW, the court overturned a provision of the corporate franchise tax law which gave Kentucky corporations a deduction for stock owned in subsidiary companies. The court ruled that the deduction could not be limited to Kentucky corporations so it invalidated the deduction for all corporations. As a result of this ruling, holding companies and many other businesses based in Kentucky must now pay the corporate license tax twice on the same assets – once at the subsidiary level and once at the holding company level.
Banks are especially hard hit by this decision, but the impact extends to many other industries. Estimates of the cost of this double taxation to Kentucky businesses range from $80 million to $200 million per year. As a result, several legislative solutions have been proposed, including eliminating the corporate license tax, as well as extending the deduction to all corporations. Regardless of the solution, the double taxation resulting from the ITW ruling highlights the need for tax modernization.
Tax modernization is necessary to attract new businesses to Kentucky and to spur existing business growth. Our tax code is a relic from an era when Kentucky’s economy was primarily agrarian. While agriculture is still a vital component of the state’s economic well-being, we must develop a tax code that is more appropriate for the information, technological and service economies that are expected to be the primary engines of economic growth in the 21st century.
Such a tax code should provide more stable revenue growth in the future without increasing the tax burden on the private sector. Any changes should be business-friendly, encouraging investment and job creation.
These changes are especially important to the development of small businesses. Reducing the tax burden on start-up entities is essential. We must not dampen the entrepreneurial spirit that fuels economic prosperity. Small business development is a driving economic force for not only Louisville but the state as a whole, and our tax code needs to encourage this investment in our communities.
Under our existing system, state budgetary problems are endemic and subject to seismic shifts in tax receipts caused by judicial rulings like ITW and natural economic cycles. By better matching tax structures to the state’s economy, we can ensure a tax base to support better schools, care for the elderly, infirm and poverty stricken while providing the services necessary to support Kentucky’s businesses.
The case for tax modernization is compelling, and its need is overwhelming. It cannot wait until a special session or the 2005 Regular Session. That is why businesses need to demand that the General Assembly pass tax modernization during this session. Our future depends upon it.