Currently Kentucky is facing a budget deficit of 108milliondollarsforthefiscalyear2010.Assomelawmakerssearchforrevenueoptions,onepossibilityistoconsiderasalestaxonprofessionalservices.Professionalservicesareconsideredanykindofservicethatrequiresskill,knowledge,reputation,ethics,andcreativity.Forthepurposeofthisstudy,medicalservicesarenotincludedinthiscategory.Manyoftheservicesareinfrequent,suchastheservicesofanattorneyoranaccountant.Aprofessionalservicestaxcouldbeusedforbothbusinessesandindividuals,orcouldmakebusinessestaxexempt.Asof2010,threeotherstatestaxprofessionalservices:NewMexico,Hawaii,andSouthDakota.Accordingtotaxprofessionals,onemodelofanalyzingapossiblenewtaxistoexaminethepotentialrevenue,incidence,andcompetitivenessofthetax.ThepotentialrevenuecanbeestimatedbyfindingtheapproximateamountofrevenuespentonprofessionalservicesandperformingaMovingAverageForecast.Thiswouldassume0Potentialrevenuewasestimatedtobeabout322,000,000 for the fiscal year 2010. Analysis of the incidence of the tax estimates that the burden of the tax would unfairly fall on those in the lower income bracket, and could also have a negative effect on small businesses. While the structure of the tax code could be written to exempt the professional services consumed by businesses, then the amount of revenue generated would not be as much since businesses make up at least a portion of professional service clientele. However, broadening the tax base helps keep tax rates lower. It is also important to consider that most professional services are generally considered an inelastic service, since many professional services are necessary, such as hiring an attorney or an accountant. The fact that surrounding states do not tax professional services could also drive business to neighboring states, especially in circumstances like Northern Kentucky and Cincinnati, when many professional services are located right across the river. The surrounding states have a comparable sales tax to Kentucky.
After considering all possible outcomes of the tax, it is recommended that Kentucky not institute a tax on professional services, and continue to study revenue options. Even though taxing professional services could cover a significant portion of the budget deficit, there are still too many unknowns in regards to the incidence of the tax