The following is an op-ed piece authored by Kentucky Chamber President and CEO Ashli Watts
Debating tax reform is almost as Kentucky as basketball, horses, or bourbon. Studies have been conducted. Proposals have been put forth. Legislation has even been passed. Nonetheless, we continue to watch from afar as tax codes in neighboring states foster the dynamic growth that has eluded Kentucky for decades.
This is not to say policymakers have not made progress in recent years. Far from it. In 2018 and 2019, the Kentucky General Assembly enacted pro-growth reforms that have accelerated our economy. These measures included reductions to individual income taxes and lowering taxes on businesses. Since then, Kentucky employers have announced record-breaking investments, while rising state revenues have allowed the legislature to increase investments in services such as education, health care, pensions, and economic development.
While the success of these measures illustrates the positive impact of tax reform, a comparison of Kentucky’s economic progress to other states underscores the urgency of taking bolder steps to truly reform Kentucky’s tax code and position the Commonwealth as a top-tier state for economic growth.
Consider, for example, that Kentucky’s population grew at roughly half the national rate in the most recent census. Based on studies of moving patterns, almost every year in the past decade, more people left Kentucky than moved here. Many of these individuals have been our academic high-achievers and college graduates. Our workforce participation rate has been declining for two decades, underperforming both national and regional averages. As the Kentucky Chamber Foundation stressed in a 2021 report, Kentucky’s workforce participation rate is the third lowest nationwide. On top of these distressing trends, the overall size of Kentucky’s economy grew by only 21 percent between 2000 and 2020, one of the lowest growth rates in the nation.
There are many policy levers state leaders will need to pull to ensure Kentucky reverses course, but tax reform is the most powerful one. This is especially true of reforms focused on reducing taxes on work and income.
As highlighted in a recent report on Kentucky’s tax code by the nonpartisan think-tank, The Tax Foundation, states with no or low income taxes have seen stronger population growth than higher-income tax states like Kentucky. Tennessee, which has no income tax, saw its population grow at twice the rate of Kentucky’s over the past two decades. In fact, “states that forgo income taxes have seen their populations grow at twice the national rate” in the past ten years, according to the report.
Not surprisingly, low taxes on labor and strong population growth have fueled workforce participation in low- and no-income tax states. On average, the workforce participation rates of no-income tax states are more than a full percentage point higher than states with income taxes. As President Reagan once said, “if you want less of something, tax it.”
Some may argue lowering the income tax could be regressive. The evidence shows that simply isn’t true. All levels of income-earners directly benefit from reduced taxes on their hard work. Low- and no-income tax states have experienced stronger economic growth as well. In the previous decade, the economies of no-income tax states grew more than 50 percent faster than states with income taxes.
The benefits of lower taxes on income and work are no secret. States throughout the nation are actively working to reduce their reliance on income taxes in favor of more neutral revenue sources like sales taxes. In 2021, 12 states reduced taxes on income, including states like Missouri, Ohio, and North Carolina. More states are expected to act in 2022, potentially Indiana, which already boasts one of the lowest income tax rates in the nation.
Kentucky can no longer afford to stand still. Now is the time to build a competitive tax code to attract new residents and support working families, keep our kids from moving to other states after graduation, increase our skilled workforce, and attract and retain businesses, investments, and opportunity for all.