Kentucky’s sales tax structure should ideally apply only to final personal consumption and exempt business inputs to avoid tax pyramiding. However, Kentucky currently taxes business inputs to varying degrees, despite efforts to remove them from the tax base. The economic literature shows that taxing business inputs causes economic distortions, nonneutral tax burdens, and increases regressivity. Kentucky should focus on broadening the sales tax base to include more consumer transactions while ensuring broad exemptions for business inputs. Expanding the sales tax to more business inputs would make the tax code worse, as taxing business inputs is more economically harmful than taxing income.
Source Tax Foundation
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