Kentucky currently has an illogical tax structure that’s highly dependent on income taxes and less so on sales and property taxes, especially at the local level. The disproportionate nature of income taxes to property taxes in Kentucky — especially relative to border states — favors people who hold their wealth as property and hurts people whose main source of wealth is their human capital.
Kentucky’s tax structure actually mitigates its own efforts to attract hi-tech businesses and young, highly educated workers. After all, who wants to see their individual or corporate earnings taxed excessively?
As a rule of thumb, local economic activity is more sensitive to changes in state taxes than federal taxes, in part due to the interstate mobility of capital and labor. For example, when given a choice, high income households choose to live in our border states that tend to have lower income taxes. This is particularly true along our Tennessee border.
A report done by The Beacon Hill Institute suggests that had several states applied a state FairTax, in contrast to their current system, they would have experienced tremendous growth in employment numbers and real gross annual wage rates between 2005-2009.
For example, employment in the border states of Illinois and Virginia grew by more than 15 percent in both of these states; real gross annual wage rates grew by 3.7 percent and 6.2 percent in Virginia and Illinois, respectively. It seems likely that Kentucky could experience similar strong growth if we emulated their tax policies in this regard.
While the tax structure in Kentucky is not the only thing keeping citizens from moving here, it sure isn’t helping matters. The idea of a state-level FairTax may be the ticket to attracting businesses and educated workers to the commonwealth by creating jobs and improving earnings.