PROPOSED TOBACCO, TV TAXES COULD EAT UP THEIR SAVINGS
By Ryan Alessi And John Cheves
HERALD-LEADER FRANKFORT BUREAU
FRANKFORT - When Gov. Ernie Fletcher talks about his proposed "tax modernization," he regularly mentions Kentucky's poor.
With good reason: Residents can owe state taxes on salaries as low as $3,000 a year. The last time the state's personal income tax laws were altered was 1954, when a family could actually live on that amount.
So along with the corporate breaks, loophole-closing and higher taxes on cigarettes and alcohol that Fletcher's plan includes, there's a provision to drop 125,000 low-income Kentuckians off the personal income tax rolls.
And everyone else would get a 5 percent cut.
But as a legislative conference committee prepares to decide the fate of the governor's proposed legislation, starting next week, at least one analysis suggests the savings would be small, particularly for the working poor.
Taxpayers making $38,400 a year or less -- about 60 percent of working residents -- would get off the hook for about $40 a year in income tax. But those who smoke, drink and have satellite television would more than give it back, according to a study prepared by the Washington-based Institute on Taxation and Economic Policy.
Endorsers and critics
A host of business, tourism and industry groups, ranging from the Kentucky Farm Bureau to the Kentucky League of Cities, has publicly endorsed Fletcher's overall package, which he says will stimulate economic growth and jobs.
But a coalition of Kentucky advocacy groups that paid for the study of the governor's proposals maintain that wealthier individuals and corporations would benefit the most.
"We would say this is not a fair plan," Debra Miller, executive director of Kentucky Youth Advocates, testified at a recent House hearing.
The effect of proposed new taxes on satellite TV bills, beer and cigarettes represents a greater proportion of the money earned by low-income residents, she said. Fletcher's plan includes higher taxes on alcohol and tobacco and a 7.62 percent levy on all telecommunications serv-ices, including some that aren't currently taxed.
The lowest-earning 20 percent of Kentuckians -- anyone making less than $12,600 a year -- would realize about 9 percent of the total savings generated by personal income tax changes, the institute's study said.
By contrast, the study said, 57 percent of the tax breaks would benefit the wealthiest 20 percent of Kentuckians, who have income of more than $61,700 a year.
The 1 percent of Kentuckians who have the highest incomes would save an average of $1,437 a year. Residents earning between $61,000 and $112,000 would save an average of $135.
Those who no longer had to pay income taxes at all would save about $40 a year, the study said. That's the same as what a Kentucky family in the middle, earning about $30,000, also would save.
The analysis has prompted at least one organization -- the Catholic Conference of Kentucky -- to withhold endorsement.
At a news conference last week held by organizations that advocate for the poor, the Catholic Conference's deputy director, the Rev. Pat Delahanty, said the Fletcher administration asked for his group's support but didn't get it. He said the group concluded the tax plan "is unjust."
The Fletcher administration disagrees. Income tax savings are available to the poor in the same proportion as everyone else, officials say.
State Budget Director Brad Cowgill recently told a House committee that low-income families can save money if members don't smoke, consume only a moderate amount of alcohol, and pay about the average for telephone and television services. However, high use would offset their income tax savings.
In addition, some of the state's working poor could benefit by landing one of the higher-paying jobs that the tax plan is designed to create, Cowgill said.
Both Democratic and Republican lawmakers have praised parts of the governor's plan, including cuts in corporate taxes as well as the personal income tax changes.
Giveback gives pause
But several, including House Appropriations and Revenue Committee chairman Rep. Harry Moberly, D-Richmond, worry that another part of the plan could crimp the state's ability to generate money in the long term.
The proposal includes a clause that would gradually lower personal income taxes even more than the opening 5 percent trim.
If Kentucky's revenue forecasts showed that the state was starting to bring in more money than required to pay the government's bills in a year, half of the extra funds would be returned to taxpayers.
The complicated "trigger mechanism" formula would take into consideration population growth and inflation.
But some lawmakers said that would make it difficult for the state, which has been chronically strapped for revenue, to build up cash reserves or pay for new programs during economic booms.
Jason Bailey, co-director of Lexington's Democracy Resource Center, called the give-back trigger shortsighted and dangerous.
Cowgill said the governor and legislature could still override that clause if the state needed the money to cover rising costs of programs, such as Medicaid, or if it wanted to put away more money.
Moberly said last week that those types of questions are likely to dominate next week's negotiations between the House and Senate.