Monday, March 22, 2004

Critics of Fletcher's tax plan attack its 'revenue neutrality'


Analysis

By Charles Wolfe
The Associated Press

FRANKFORT - One of Gov. Ernie Fletcher's selling points for his "tax modernization" plan - that it would be "revenue neutral" - has become a focal point for its critics.

It has given opposition Democrats in the General Assembly a line of attack. An e-mail to House Democrats from the speaker's office - subsequently obtained and disseminated by Fletcher's staff - advises Democrats to stop calling the plan "tax modernization" or "tax reform" and refer to it instead as "the governor's tax increase."

Fletcher, who says Kentucky's tax system repels businesses and the affluent, wants to roll back or abolish some business taxes. He also would reduce income taxes on individuals and repeal taxes on stocks, bonds and other "intangible" property.

But it is the other half of his plan - the tax increases that would be needed to balance the cuts - that is getting the attention.

Though the business tax base would be broadened, Fletcher's plan, in the main, would make up the money with higher taxes on tobacco products and alcoholic beverages. There also would be a new telecommunications tax that would include satellite television service.

Those increases would be more apparent than the decreases. The plan is initially "revenue neutral," the state - in theory - would take in no extra money, following budget cuts for universities and an unresolved deficit in Medicaid.

"We are not of the opinion that, when we're hundreds of millions of dollars in the hole, that a revenue neutral tax modernization plan is going to do a thing for us," said Senate minority leader Ed Worley of Richmond.

"If we start 300 million (dollars) in the hole, and we do revenue neutral tax modernization, we finish 300 million in the hole," Worley said. "That doesn't address any of the needs of Kentucky."

Fletcher, making a personal pitch to the House appropriations committee last week, said: "The way we will raise revenue in this plan is creating jobs."

That argument is more nebulous than the rebuttal prescribed in the aforementioned e-mail, which was from Tom Martin, a spokesman for House Speaker Jody Richards.

The Fletcher plan is "a hike in taxes disguising corporate tax giveaways," Martin wrote. "Kentucky gets nothing from this except a pie in the sky hope that this will generate 'growth,' and hence new revenues."

Fletcher's plan is, in fact, driven by a belief that cutting income and business taxes will stimulate economic growth and eventually lead to more state revenue, not less, by creating more taxpayers.

That is based on the "dynamic scoring" of supply-side economics, an assumption that a change in tax policy will have a broad effect on economic behavior. Fletcher has taken a page from President Bush in this respect.

Fletcher's approach is the opposite of "static scoring," an assumption that a reduction in a given tax will simply yield a reduction in revenues from that tax. No change of behavior is assumed.

"Static scoring will underestimate the revenues you will get from lowering high tax rates," said Paul Coomes, a University of Louisville economist who has been following developments at the Capitol. "There certainly will be changes in behavior. The tough part is, how much?"

Coomes said he was enthused by Fletcher's original plan, which was to slash the top individual income tax rate, now 6 percent, to 4.9 percent.

"I think Kentucky has a reputation nationally of being a high tax place. The only way you're going to change that reputation is to turn the direction of your tax system around in a dramatic way," Coomes said.

Cutting the income tax rate by more than a percentage point "tells the world you are changing the tax system from one that apparently is there to sort of redistribute a lot of money away from successful people," Coomes said.

Fletcher was unable to stick with 4.9 percent, however. In looking for votes, he had to scale back some of his proposed tax increases, mainly the cigarette excise tax, which Fletcher first wanted to raise by 40 cents. He now proposes to raise it by 26 cents. As a result, he now proposes a top income tax rate of 5.68 percent.




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