Kentucky Governor Matt Bevin recently voiced his opinion that Kentucky should not have income tax and should rely on a consumption-based tax system. If re-elected, this is an idea we could expect him to push.
Here’s what he told the chamber of commerce:
“I would like to see income taxes, for example, start to not have a six in front, but a five, then a four, and a three, and to move on down to where we don’t have a state income tax.”
Bevin believes a lack of income tax would attract companies “as employees understandably care about these things.”
Not paying income taxes sounds appealing, doesn’t it? Currently, 9 states, such as Nevada, Florida, Washington, among others, do not have state income tax. Two others do not tax wages, such as Tennessee, but do tax investment income. I sure would like to bring home more of my paycheck, wouldn’t you?
Here is one of those ideas that we take in and immediately think, yeah, I want to keep more of my money. However, Bevin hopes you don’t examine the issue closely, being that we are among the poorest states in the nation, and there lies the issue with consumption-based tax systems.
Our state legislature recently dropped the tax rate on the wealthiest citizens, cutting revenue and passing the burden onto poorer citizens. If our tax system is based on consumption, we would further burden the working poor, a term that shouldn’t exist, but that’s another article.
First, to replace income tax and other tax structures, the tax rate must be high, perhaps as high as 23-34 percent, according to most estimates. We would also have to tax everything, meaning food, water, and other basic essentials. Even items like mortgage interests and student loans could be taxable. Retirement investments could be taxed twice. Income deposited into a Roth IRA has already been taxed. Under a consumption-based system, it could be taxed again upon withdrawal. Ultimately, Kentuckians would pay more taxes.
The median household income in Kentucky is only $48,375. At the state’s 5 percent flat tax rate, an average family is paying $2,418.75 in state income taxes. It’s estimated a family spends 6 percent of their income on food per year, so they would spend an extra $700 per year with a consumption tax. How about buying a new car? If you purchased a $20,000 car, you would pay $3,400 in additional taxes, on top of our current 6 percent sales tax.
Poor families will be subjected to a higher overall percentage of taxation. If a family making $20,000 annually ended up paying $2,000 in taxes, so could a family making $200,000. The poor family would be paying 10% of their total income while the wealthier family would be paying 1%. This is hardly a fair system.
In other words, poorer Kentuckians would pay a higher percentage of their income toward taxes than wealthier citizens, and if Bevin suggested a lower rate to offset this a bit, poorer families would still carry more of the tax burden and it likely wouldn’t produce enough revenue for the state.
Another side-effect would be less production of new goods, perhaps leading to fewer jobs and hurting the overall economy. People would be discouraged from purchasing new goods due to high taxes, so they would gravitate toward used goods. This would in turn drive up the price of used goods, causing Kentuckians to spend more of their income.
Those who support a consumption-based tax system, such as Bevin, argue households could avoid paying taxes every year. Yes, if you never bought anything. How realistic is this idea?
Supporters also argue it would increase the overall tax base. This is true, but at the expense of poorer families, and in a state as poor as Kentucky, it could lead to a total economic collapse. This type of system would actually decrease the value of the dollar and limit the purchasing power of all Ketnuckians, which is never good in consumer-based economy. If there is no one left to purchase the goods, what happens to the producers of goods? We all know the answer. So long term, less tax revenue would be generated year by year due to a lack of purchasing power and tough decisions by Kentuckians about what to purchase, leading to a decline in jobs, and yes, a further decline in revenue. Our economy would find itself in a downward spiral that it from which it may never recover.
Bottom line, a consumption-based tax system breaks the backs of low-income Kentuckians. States without income tax often have something to offset the loss of revenue, such as very high tourism. The tax burden should be lifted from the working poor and middle class and corporations and wealthier Kentuckians must pay their fair share. We must close all tax loopholes and seek revenue from new ventures, such as marijuana, gambling, and sports betting.