Kentucky’s Regressive Tax Reform

I was pleased to be asked to comment for today’s story by Jack Brammer and Janet Patton for the Herald-Leader on the Governor’s tax proposals. They did a great job accurately representing my views. This post helps elaborate on my perspective.

Dubbed “Kentucky Competes“, Governor Steve Beshear’s tax proposal consists of more than 20 changes to our state’s tax code. The proposal contains a number of troubling components which place a disproportionate burden on Kentucky’s poor, while providing large annual tax breaks which are skewed toward businesses and the wealthy.

I have three major objections to Governor Beshear’s tax reform plan:

  1. It is a taxpayer-financed corporate tax giveaway.
  2. By relying on sales taxes, the plan hits the poor and middle class harder than wealthier citizens and businesses.
  3. By choosing which kinds of labor to include (and exempt) from the sales tax, the plan hits the poor and middle class even harder.

Let me step through each one in turn.

1) Corporate Tax Giveaway


Click to enlarge

Governor Beshear’s proposals would generate an additional $210 million for the state. But like many tax reform initiatives, Beshear’s plan contains a mixture of new taxes and new tax breaks.

The Governor’s plan contains approximately $487 million in new annual tax breaks, more than offset with about $697 million per year in new taxes.

That’s nothing especially disturbing, given that the reform plan is supposed to put the state on sounder financial footing, and raising taxes is one way to do that.

What is disturbing is how the mix of breaks and taxes are allocated. Nearly half of the Governor’s tax breaks go to businesses (amounting to $234 million per year). So what’s their share of the new taxes that Beshear proposes? Nearly zero:


Who benefits and who pays?

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Businesses pay a lot less...

I say ‘nearly’ zero because there will be some businesses which pay the new sales taxes for covered categories like auto service or computer repair. But given the exemptions and restrictions on these new sales taxes, the business share of the almost $700 million in new annual taxes will likely be very, very small.

So businesses (some of them, at least) will get a collective windfall of more than $234 million per year under Beshear’s plan, while simultaneously contributing no new taxes to the state.

Throughout the documents Beshear’s office released yesterday, there is the notion that this corporate giveaway will help Kentucky “compete for quality jobs.” The underlying assumption is that if “job creators” are given enough tax cuts, that they’ll hire our way to prosperity. This notion is, at best, misguided; at worst, it is an outright lie.

As I have written before (more than once, in fact), business owners do not hire because they have extra tax-cut money lying around. We hire because we have work to do, and we need someone to get it done. We hire when there’s more demand.

...while Kentucky families pay a lot more.

Meanwhile, because businesses wouldn’t pay these new taxes, the burden is placed squarely on Kentucky’s families. When paired with the tax breaks for individuals, Kentucky households would pay about $444 million more in new taxes each year (or approximately $260 per household.)

While the Governor trumpeted the ‘relief to every working Kentuckian’ yesterday, the hard truth is that his scheme raises taxes on nearly every working Kentuckian in order to fund an enormous tax giveaway to select (usually large) businesses. This plan is a stunning, brazen, and inexcusable attempt to redistribute wealth from those who can least afford it to the already-wealthy.

2) Sales Taxes

Sales taxes are an incredibly regressive tool for raising money for Kentucky. They are regressive in the sense that sales taxes hit poorer people harder than wealthier ones.

Why are sales taxes especially burdensome for the poor? Because the extra tax takes up a greater portion of their income for the same product or service. The extra tax just hurts more.

Even though the Governor’s proposal includes some $72 million in Earned Income Tax Credits (credits for the working poor – generally a good contributor to the economy and job production), he bleeds those benefits away with new sales taxes.

And the proposed sales taxes are almost exclusively in consumer services, while sales taxes for business services are largely exempt.

Ordinary Kentuckians would not benefit under Beshear’s regressive plan.

3) Different Kinds of Labor

The Governor’s plan also targets only certain kinds of labor for sales tax expansion. In particular, it chooses to apply sales taxes to labor involved in the “installation, maintenance and repair of taxable personal property.” In other words, the repair and service of personal items (like cars or computers) would be taxed under Beshear’s plan.

But not all service labor is equal, under the Governor’s scheme. Other kinds of labor – say, accounting or legal services – would be exempt from the new taxes. And who disproportionately uses a lot of those exempted services? Businesses and the wealthy, of course.

Even within the “installation, repair, and maintenance category”, there are exclusions. Because these new taxes apply to ‘personal property’, they exclude repair and maintenance services for machinery, farms, and real estate properties — the kinds of services consumed in greater amounts, once again, by businesses and the wealthy.

By steering the new taxes away from services which impact the wealthy, Beshear hits ordinary Kentuckians especially hard.


Governor Beshear’s new tax proposal is an audacious attempt to take wealth from Kentuckians who are hardest hurt by our economy, and attempts to transfer that wealth to the already-well-off.

It is a colossally bad idea which will leave millions of Kentuckians worse off. And we shouldn’t let him get away with it.

After the jump: Backstory

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The 1345

Mitch McConnell
Yesterday, despite having support from a majority of the Senate, the $60 billion Rebuild America Jobs Act was blocked from even being debated on the floor of the Senate by Kentucky’s own Mitch McConnell and Rand Paul – along with every other Republican senator.

The Act included $50 billion in direct spending for roads, bridges, and other infrastructure, as well as $10 billion towards starting the National Infrastructure Bank.  Both ideas have traditionally enjoyed bipartisan support.

The bill would be paid for by a 0.7% surtax on incomes over $1 million.

The Department of Transportation estimated that the Act would create about 800,000 new jobs.

McConnell was unapologetic for blocking debate on the bill:

“The truth is, Democrats are more interested in building a campaign message than in rebuilding roads and bridges,” said Senate GOP Leader Mitch McConnell of Kentucky. “And frankly, the American people deserve a lot better than that.

800,000 jobs seems like more than a campaign message.

But these national numbers are a bit hard to get our arms around.

It’s worth evaluating the impacts of this bill on a more local level.  What would the Act do here in Kentucky?

Over 200,000 Kentuckians are out of work.  That’s nearly 10% of the labor force.

And since September, one of two major bridges crossing the Ohio River in McConnell’s hometown of Louisville has been shut down after inspectors found cracks. Another bridge between Kentucky and Cincinnati has been deemed “structurally deficient”.

Rand Paul
The bill McConnell and Paul voted against would have spent over $450 million on roads and bridges in Kentucky, and would have created 5,900 jobs.

Why would Mitch McConnell and Rand Paul reject 5,900 jobs for Kentucky? Why would they oppose fixing Kentucky’s infrastructure?

Maybe they’re concerned with raising taxes.  As McConnell said on Meet the Press, “We don’t want to stagnate this economy by raising taxes” on those who make over $1,000,000, who Republicans are fond of calling “job creators” and “small business owners”.

So let’s take a look at who makes over $1,000,000 in Kentucky.  According to Citizens for Tax Justice [PDF Link via Greg Sargent] out of Kentucky’s 4.3 million citizens, there are 1345 Kentuckians who would be affected by such a tax, and they make an average of nearly $3.5 million.

And it’s worth noting that The 1345 are folks who don’t just have $3.5 million – enough to qualify them as multi-millionaires.  These are people who clear $3.5 million per year.

The 1345 are the ultra-wealthy.  And businesses which help their owners reap $3.5 million per year are not ordinarily considered “small”.

And what is the onerous burden the “millionaire’s tax” would place on The 1345?

Out of their $3.5 million in income, The 1345 would pay $17,409 more to fix Kentucky’s roads and bridges which they undoubtedly benefit from more than Kentucky’s other 4,338,000 citizens.

So: McConnell and Paul blocked the creation of 5,900 jobs and the improvment of roads and bridges for all Kentuckians in order to protect The 1345, a tiny group of ultra-wealthy Kentuckians who would pay only $17,409 to rebuild the infrastructure they use more than anyone else.

McConnell claims he doesn’t want to “stagnate the economy” by taxing The 1345, which raises the question: What have these ultra-wealthy “job creators” been doing with this money while they’ve kept it?

Because they certainly haven’t been creating jobs.

Mitch McConnell and Rand Paul chose to protect The 1345 at the expense putting 5,900 Kentuckians back to work.  At the expense of our crumbling roads and bridges.  At the expense of the other 4,338,000 Kentuckians.

And frankly, the American people – and Kentuckians – deserve a lot better than that.

Confessions of a Job Creator

I’m a job creator.  And job creators are important.

At least that’s what we’ve been hearing from Republicans lately.

House Speaker John Boehner cited “job creators” and “job creation” 26 times in a speech about the economy last week.

And in that speech, the Speaker invoked us job creators to attack the Republicans’ Unholy Trinity: taxes, regulation, and government spending:

Private-sector job creators of all sizes have been pummeled by decisions made in Washington.

They’ve been slammed by uncertainty from the constant threat of new taxes, out-of-control spending, and unnecessary regulation from a government that is always micromanaging, meddling, and manipulating.

To hear Boehner’s version of events, the government stands as the sole obstacle to us job creators as we valiantly attempt to create more jobs.

Indeed, the entire Republican establishment keeps talking about the special role we job creators play in our fragile economic recovery.

In their “House Republican Plan for America’s Job Creators” – a 10-page, large-type tome [PDF link] about the same length as this blog post – the House Republican leadership repeatedly promise to slash the Unholy Trinity of tax, regulation, and spending.  On Sunday talk shows, more of the same.

If only we job creators paid less money in taxes, Republicans say, we would hire more.

If only we were free from government regulation, we would hire more.

If only we were less concerned about government spending, we would hire more.

As much as I appreciate Republicans’ apparent concern – their willingness to dump money in my pocket, their longing for my freedom to pollute with abandon, their eagerness to drive the nation to the edge of default to keep government spending in check – here’s the thing:

Their efforts won’t help me create a single job.

Not one.

In fact, Republican attacks on taxes, regulation, and spending do quite the opposite, because Republicans are thoroughly wrong on the mechanics of hiring.

I don’t hire because I have extra jingle in my pocket.  I don’t hire because I can avoid complying with some regulation or tax.  I don’t hire because the government is spending less.  I hire because there’s more work to do.

No responsible businessperson is going to hire simply because they have extra money lying around or because they can dump motor oil in the sewer. As generous as I might be, I won’t hire out of charity.

Entrepreneurs hire because they have work to do, and a new employee can help them get that work done.  They hire to help meet demand. And demand is fueled by customers who have money to spend.

And that’s the fallacy of the Republican job creator mythos: Job creators don’t “create” jobs.  Our customers do.

And the evidence proves the Republican fallacy. Taxes are at historic lows [PDF link]. Corporate profits are at record highs. Government spending has collapsed.  These are the very conditions under which, according to Republicans, we job creators should be creating jobs.

But we aren’t.

Despite these supposedly wonderful conditions for job creators, one in six Americans remain unemployed or underemployed. Income and household wealth has stagnated for over a decade. Instead of hiring in this environment, corporations are hoarding record stockpiles of cash in the face of weak demand.

No demand, no jobs.

That’s not to say that we entrepreneurs – let’s just drop the “job creator” garbage – are powerless.  We can foster conditions which promote growth (the right business model, the right service, the right people); but we need customers with a willingness to spend to make our businesses grow and to create an environment where hiring is possible and profitable for us.

Bottom line: Give me money, and I’ll sock it away in the bank.  Give me customers, and I’ll give you jobs.


On Compromise

Last night, Congress passed the $900 billion tax compromise reached between President Obama and Republican leaders.

In the end, progressives and conservatives alike lambasted the deal.  And that might be a very good thing.

I’m no fan of the bonus tax cuts for the wealthy that Obama conceded to congressional Republicans; Despite Republican claims, those cuts fail to create significant job growth.

Lost in much of the analysis over what Obama conceded, however, is just how many bigger concessions he won back from Republican leaders, as Ezra Klein points out with this chart:

Tax Cut Compromise Proportions

Unproductive and unneeded tax cuts for the wealthy make up only one-eighth of the compromise. The other seven-eighths of the deal are much more stimulative to our economy and to job production.

In essence, this tax deal is a second “stimulus” which is much-needed at this stage of our fragile economic recovery.


During the Constitutional Convention in Philadelphia in 1787, representatives of each state teetered on the knife’s edge between walking away from the proposed Constitution for what they might have to give up, and giving up important principles (and power) in order to gain something better, stronger, and more resilient.

While the present compromise is not nearly as momentous, it does remind me of what Benjamin Franklin – then 82 years old – said when addressing that convention in September, which galvanized the representatives into agreement:

I confess that there are several parts of this constitution which I do not at present approve, but I am not sure I shall never approve them: For having lived long, I have experienced many instances of being obliged by better information, or fuller consideration, to change opinions even on important subjects, which I once thought right, but found to be otherwise. It is therefore that the older I grow, the more apt I am to doubt my own judgment, and to pay more respect to the judgment of others. Most men indeed as well as most sects in Religion, think themselves in possession of all truth, and that wherever others differ from them it is so far error. Steele a Protestant in a Dedication tells the Pope, that the only difference between our Churches in their opinions of the certainty of their doctrines is, the Church of Rome is infallible and the Church of England is never in the wrong. But though many private persons think almost as highly of their own infallibility as of that of their sect, few express it so naturally as a certain french lady, who in a dispute with her sister, said “I don’t know how it happens, Sister but I meet with no body but myself, that’s always in the right – Il n’y a que moi qui a toujours raison.”

In these sentiments, Sir, I agree to this Constitution with all its faults, if they are such; because I think a general Government necessary for us, and there is no form of Government but what may be a blessing to the people if well administered, and believe farther that this is likely to be well administered for a course of years, and can only end in Despotism, as other forms have done before it, when the people shall become so corrupted as to need despotic Government, being incapable of any other. I doubt too whether any other Convention we can obtain, may be able to make a better Constitution. For when you assemble a number of men to have the advantage of their joint wisdom, you inevitably assemble with those men, all their prejudices, their passions, their errors of opinion, their local interests, and their selfish views. From such an assembly can a perfect production be expected? It therefore astonishes me, Sir, to find this system approaching so near to perfection as it does; and I think it will astonish our enemies, who are waiting with confidence to hear that our councils are confounded like those of the Builders of Babel; and that our States are on the point of separation, only to meet hereafter for the purpose of cutting one another’s throats. Thus I consent, Sir, to this Constitution because I expect no better, and because I am not sure, that it is not the best. The opinions I have had of its errors, I sacrifice to the public good. I have never whispered a syllable of them abroad. Within these walls they were born, and here they shall die. (…) I hope therefore that for our own sakes as a part of the people, and for the sake of posterity, we shall act heartily and unanimously in recommending this Constitution (if approved by Congress & confirmed by the Conventions) wherever our influence may extend, and turn our future thoughts & endeavors to the means of having it well administered.

On the whole, Sir, I can not help expressing a wish that every member of the Convention who may still have objections to it, would with me, on this occasion doubt a little of his own infallibility, and to make manifest our unanimity, put his name to this instrument.


Progressives hate what was conceded in this deal.  So do conservatives.  And everyone should be concerned over how much this deal grows our national debt.

Both sides wanted their leaders to stick to core principles – no matter the cost.  But that’s demogoguery, not democracy.  It isn’t how our country works.  It isn’t how our country was formed.

“Compromise” has become a foul word in this political season.

But it is the very heart of a functioning democracy.

A Small Business Perspective on Jobs and Tax Cuts


In late July, one of our technicians left our award-winning auto repair shop to return to his hometown.  He has been our only employee to leave since I bought the business over two years ago.

His departure raised a question for us that a lot of small businesses have faced in this economy: Do we accept the risks of hiring a new employee to replace him?

The answer, I think, is instructive for many of the economic and political issues facing our country.


Impatient voters punished Democrats two weeks ago for not giving enough focus to our nation’s sputtering economy after the near-implosion of 2008.

With our nation’s unemployment rate hovering just under 10% (and ‘real’ unemployment much higher), voters sent a clear signal that they want government to focus on creating jobs and growth.

According to the Small Business Administration [PDF Link], small businesses like ours make up 99.7% of employer firms, and account for two-thirds of new job creation.

Both Republicans and Democrats have reiterated the importance of getting small businesses hiring to get our country’s economy moving again.


This week, congress reassembles in the wake of the elections to consider extending temporary tax cuts  implemented under the Bush administration in 2001 and 2003.

Republicans want to extend the entirety of the Bush tax cuts, which would add $5 trillion to the national deficit over the next ten years, and vastly expanded the national debt over the past decade.

Democrats want to extend the tax cuts as well, but would let them expire for the highest-income households which make over $250,000 per year.  The Democratic plan would cost almost $700 billion less than the Republican plan over the next ten years.

Republican leaders claim that giving tax breaks to top earners is critical to generating the new jobs that the economy needs to recover.

Unfortunately, they’re wrong.


Just how would the Republican proposal affect small business jobs? A hypothetical example from my industry might help us get to an answer.

A very healthy auto shop might have annual sales of $1,000,000 – an amount which would put it well into the top 5% of shops nationwide.  If that shop is exceptionally well-run, it might see net profits of 30%, or $300,000.

For those few shop owners in such a fortunate situation, what are the implications of extending the Bush tax cuts for those making more than $250,000?  Under the Republican plan, that shop owner would save an incremental $1,500 in taxes over the Democratic tax cut plan.

As a small business owner, I’d happily take the $1,500.  But such a small amount would give me zero incentive to undertake the much greater expense – and risk – of hiring a new employee.

So while extending the Bush tax cuts would certainly line my pockets, they would do little to encourage me to create jobs in my small business.


Some observers might contend, as incoming House Budget Committee Chairman Paul Ryan did on CNBC yesterday, that most job growth comes from larger “small” businesses and that my example above isn’t really that relevant to job creation.

So let’s pretend, for a moment, that our hypothetical business is actually 10 times as large as the example above: It has annual sales of $10,000,000, and its owners see profits of $3,000,000 per year.

Under the Republican plan, that business owner would save an additional $125,000 in taxes over the Democratic tax cut plan.  Now, this seems like an amount which might let a business hire a couple of additional employees.

But while the tax savings might be enough to hire additional employees, it provides little actual incentive to use that newfound money to hire in an uncertain economic environment.

A tax windfall fails to meet a prudent business owner’s criteria for making a hiring decision. Business owners don’t hire because we have extra money laying around. We don’t hire out of charity. We hire when there is more work to do.

Again, I’d happily take the $125,000.  But I’d also know that a drop of just 1% in my sales – a fairly likely risk in our current economy – would wipe out my tax savings.  If I were that business owner, I’d stash my cash as a hedge against an uncertain economy.  Net effect: no new jobs created.

The criteria for hiring is scalable: Whether a business has $1 million, $10 million, or $100 million in sales, the decision to hire is based on needing employees to meet demand – not on having spare cash supplied by tax cuts.


In my shop, the economic slowdown – coupled with a nearby street closing for almost a year – contributed to a sales decline of over fifteen percent from our record 2008 levels.  The declines would have been worse if not for our solid reputation, our increased community involvement, and our vigorous marketing.

In fact, our business has more customers than ever before; It’s just that each one is investing far less in their cars.  We see a lot more folks putting off needed maintenance and hoping that their cars won’t break down.

And as I look at replacing the technician who left in July, this drop in sales has been my primary consideration.

An extra $1,500 from tax cuts wouldn’t induce me to hire a new technician.  Neither, frankly, would an extra $125,000.

I’ll hire when our core business is better – when there is more work to do – and not just when I have a convenient pile of cash.

And to make our business better, we need more customers with more money – and more willingness to spend.


To encourage small business hiring, policymakers need to encourage spending.  In particular, they need to encourage the kind of spending which reverberates through the economy as that money is spent and respent in the form of wages, further buying, more wages, and – ultimately – hiring.

This respending feedback loop is key to creating enough demand that businesses like mine will start to hire again.  It is key to driving our nation’s self-sustained economic growth.

The fatal flaw of tax cuts for the wealthy is that the cuts don’t foster respending at a scale which drives significant hiring.  As seen in my examples above, a large chunk of each dollar given out in tax cuts to the wealthy is stowed away in savings – thereby stunting the benefits to the economy.

Mark Zandi, Moody’s Chief Economist, has found the same phenomenon in his research (Full PDF Here).

Tax cuts to the rich don’t yield as much overall economic benefit because the wealthy don’t need to (and won’t) spend that money, thus diminishing the virtuous feedback loop.


Government spending which goes to those in need – the poor, the unemployed, state governments – does get respent (often out of necessity) and the feedback loop is much, much stronger than with tax cuts.


If I’m looking at my bank account, the tax cuts seem like a fantastic idea. More money for me!

But if I’m looking at my business, my employees, their families, and my community – I want the government to focus on assisting those in need.  I want the government to encourage buying (especially from small, local businesses).  That’s what will help my business for the long term. That’s what will – ultimately – encourage me to hire.

Lose the tax cuts.  Give me customers instead.

Taxes, Taxes, Taxes

I’m quite a bit different than my business-owning peers — I actually don’t mind paying taxes. I get a lot of benefit from those taxes: providing for our common defense, local police and fire protection, and a pretty great infrastructure (by world standards), among many other services that our governments provide.  It is my duty as a citizen to financially support the governments that protect and enable our freedoms.

I feel this way even though those services and those governments should be much more efficient and much less bureaucratic than they are.  So I’m not a typical all-taxes-are-evil type of business owner…

But I hate dealing with taxes.Tax-burden

When I bought this business, I knew that I was going to have to deal more with taxes and payroll issues than when I was an individual employee of a corporation. (Unlike many businesses, we don’t send our payroll or most of our taxes out to other professionals. Yet.)

But I totally underestimated the crushing administrative burden of the variety, frequency, and complexity of tax payments.  Besides dealing with federal, state, and local governments (which I expected), I quickly learned that each entity had many different types of taxes, each with different weekly, monthly, and quarterly schedules, and each out-of-sync with the others.  There were many taxes which we paid and documented on a regular basis which had to be re-documented periodically.  Then, in January, the schedule gets jumbled from every other tax period.  It is needlessly complicated and time-consuming.

Again, I’m a willing taxpayer (although I’d always welcome paying less).  But I don’t want to be a tax expert.  And I don’t want to be forced to hire one.  And I don’t want to spend so much time managing our taxes when it should be spent managing our business…

There must be a simpler way for businesses to contribute to their governments.