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June 2012
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BAD IDEA There's no such thing as a 'temporary' tax

Among the various new tax ideas floating around the Kentucky Legislature this year is one we find particularly problematic. It is an effort to place a constitutional amendment on the November ballot that would allow cities to impose a "temporary" local sales tax of up to 1 percent to pay for specific capital improvement projects.

The mayors of Louisville and Lexington are campaigning hard for the amendment, and it also has support from the Kentucky League of Cities. The KLC argues that 38 states allow one or more cities to have a local sales tax levy, including all but one of the states bordering Kentucky. The league also says Kentucky ranks 44th in the nation in the amount of local taxes it collects.

That last part is not a surprise. In a generally high-tax state, one reason local taxes remain relatively low is precisely because we are one of 12 states that do not allow local sales tax levies. And it's not like ranking 44th in education. The fact we're 44th in local taxes doesn't mean we need to raise taxes to get to the national average.

Kentucky's problem as far as taxes are concerned is that the state taxes everything. Fewer than five states, last we checked, tax Internet newspaper subscriptions. Kentucky is one of them. According to the Tax Foundation, Kentucky's state income tax rate is the 20th highest in the nation. Its average state income tax collections of $967 per person in 2010 were 17th highest in the nation. Its tax burden - the amount of taxes collected proportional to the taxpayer's average income - was 26th in the nation in 2010.

The problem with all that is that in 2010, 2011 and 2012 Kentuckians' average per capita income remained mired at 44th in the nation. So any argument that a Kentucky tax rate that is below the national midrange is a "low" tax doesn't really hold water. In a state that is 44th in per capita income, being 44th in local taxes suggests that those taxes, at least, are in balance.

Statistical arguments aside, it is pretty much a given in today's political world that "temporary" tax increases are never truly temporary. A case in point is the "temporary" .5 cent payroll tax increase Paducah adopted in 2005. When it came time for the tax to expire three years later, city commissioners couldn't bring themselves to part with the extra $4 million a year the new tax was generating. Commissioners voted 3-1 to make the tax permanent so the city could "continue important projects."

The effect of that vote was a 33 percent increase in the local payroll tax, which is now two cents on every dollar earned. The city can raise that rate at any time. Or lower it. So the only real purpose we see in adding the tool of a "temporary" local sales tax is to provide local governments with political cover to tax more and spend more. One can envision an endless stream of worthy "capital projects" such that a local sales tax of up to 1 percent would be stacked atop the 6 percent state sales tax (which some legislators want to raise) ad infinitum.

That's not the sort of thing that over the long term is going to entice merchants to locate or customers to shop inside the city or county. It's just a bad idea.

Finally we note that sales taxes are the most regressive form of taxation. The costs they add to every purchase by definition hit people with the least money the hardest. To use that sort of tax to fund "capital projects" - water parks, bike paths, and other civic luxuries - is not the right way to go about it.

Kentucky and its cities already suffer from the consequences of heavy taxation relative to most surrounding states. The consequences manifest themselves in slow growth, fewer business start-ups, and a state unemployment rate that has grown over the past year even as the national rate has fallen. The only way to reverse these trends is for voters to push government away from the trough.

We are skeptical that the local sales tax measure will make it out of the Legislature despite the ongoing lobbying on its behalf. But if it does make it onto the ballot in November, we trust Kentucky voters will send it to the fate it deserves.

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