AN ANALYSIS OF THE KENTUCKY INCOME TAX*

Abstract

THE 1936 KENTUCKY GENERAL ASSEMBLY adopted an income tax as a major source of tax revenue. Selected areas of inquiry include compliance, underreporting, discriminations stemming from the deduction for federal income taxes and from the definition of adjusted gross income, exempt corporations, allocation of corporation income, taxation of affiliated corporations, possible current collection program, and revenue analysis. The study sheds some light on the extent and nature of non-compliance and underreporting. A comparison of 1950 taxable income reported by resident taxpayers with estimated taxable income suggests that non-compliance and underreporting are fairly well controlled and are probably most significant in the lower income brackets and in certain counties in the Cincinnati area. An analysis of audit reports suggests the need for several legislative changes. The state law permits a deduction for federal income taxes which results in disorders of prime importance. The effect of the deduction is so pronounced that changes in federal rates tend to have an inverse relationship on state revenue. The definition of adjusted gross income also results in discriminations among certain taxpayers. Some issues concern only corporations. The statutory exemption of certain corporations is ambiguous and causes some question as to the scope of the tax. The allocation of corporation income derived from two or more states urgently needs remedial action. Particularly the property and sales factors should be redefined. The technique of determining taxable income of affiliated corporations might be improved if ascertained by the three-factor formula. Through the adoption of a current collection program, Kentucky may achieve desirable fiscal and administrative effects. The study considers aspects important to such a program, including the scope, amount of payments, returns and schedule of payments, refunds, revenue estimates, initial taxpayer burden, and attitude toward its adoption.