Kentucky panel recommends lowering corporate, personal income tax

bmusgrave@herald-leader.comDecember 6, 2012 

FRANKFORT — A task force Thursday recommended changes to the state's tax code that would generate nearly $700 million in new revenue for the state.

Gov. Steve Beshear's Blue Ribbon Commission on Tax Reform made its final recommendations after spending much of the past year listening to public testimony and hearing from a group of tax consultants about the state's tax system.

The commission recommended lowering overall corporate taxes by nearly $100 million, or roughly a quarter of what corporations pay the state in taxes.

It also recommended lowering personal income tax rates but limiting deductions, and increasing taxes on pensions.

The commission also recommended enacting an earned income tax credit, which would help Kentucky's poorest residents.

The state's sales tax rate would remain at 6 percent, but the group recommended expanding the sales tax to include some services.

Lt. Gov. Jerry Abramson, chairman of the commission, said after Thursday's nearly six-hour meeting that the commission will have its final report to Beshear by Dec. 15. Beshear has said he will look at the proposals and decide whether he will bring a tax plan to the legislature when it convenes in January.

"The hope is that with this modernized system of taxation, we can be in a position to be even more competitive in the future and create jobs," Abramson said.

He said that a proposal to generate $690 million in new revenue might be difficult for the tax increase-resistant legislature to pass, but the commission also worked to tinker with the state's corporate taxes to make them more competitive with other states.

"There is significant opportunity for the attraction of jobs and creation of jobs," Abramson said.

But the legislature faces another daunting fiscal problem: one of the largest unfunded pension systems in the nation. A pension task force recently recommended that the state put an additional $350 million into the pension system in coming years. The state already has had to cut $1.6 billion from its budget over the past several years and has no new money to put into the ailing system.

"There is connectivity between those two issues," Abramson said of tax reform and pension reform.

Rep. Jim Wayne, D-Louisville, a member of the commission who has pushed for tax reform for more than a decade, said he didn't think the commission went far enough to raise additional revenue. Consultants hired by the commission said Kentucky's tax structure, which relies heavily on personal and corporate income taxes, is not growing to meet the needs of its residents. By 2020, the gap between what the state needs to provide basic services and the revenue it generates will be $1 billion, the report projected.

"When you talk about $350 million that is automatically off that for pensions, that's not adding a significant amount for what we really need for schools and social services and Medicaid," Wayne said.

Much of the debate Thursday centered on the state's income taxes, retirement income and deductions. Kentucky does not tax the first $41,100 in retirement income. The commission originally had agreed to lower the threshold for taxing of retirement income to $15,000. But after hearing complaints from retirees, the commission revisited the issue Thursday and increased the threshold to $30,000. It also ultimately decided not to follow the federal rules on taxing Social Security income.

The bulk of Kentucky retirees do not pay any taxes on their retirement income, yet they are becoming a larger segment of Kentucky's population, the commission has been told.

Pat Mulloy, a commission member, said that an elementary school teacher and a retiree should not have different tax burdens — the teacher pays taxes, but the retiree does not.

"It's just unfair," Mulloy said.

The average income of retirees in Kentucky is $29,500. With the threshold at $30,000, those with moderate retirement incomes will not have to pay taxes, many commission members said.

The commission also reduced the amount of allowable deductions but decreased slightly the income tax rates. For example, for those earning more than $75,000 a year, the current tax rate is 6.0 percent. Under the proposal, that rate would be reduced to 5.8 percent. Some preliminary numbers provided to the commission showed that the lowest incomes would see a tax cut. The highest incomes would see a tax increase because of the limits on deductions.

Lowering income tax rates, increasing taxable retirement income and decreasing deductions resulted in a net gain of $501 million in new revenue. The bulk of that increase comes from taxes on higher-income retirees.

Abramson said it's possible that the legislature could begin discussing some of the group's proposals this legislative session. However, because this is a short session — only 30 days — the legislature needs a supermajority in both chambers to pass a tax increase, making the chances of passing a tax overhaul even slimmer.

Beshear said Wednesday that it's likely that pension reform and tax reform will be coupled. Whether the issues will be addressed during the upcoming legislative session has not yet been determined, he said.

"It's going to be a difficult process," Beshear said. "I am hopeful that we will be able to find some common ground."

"I think we ought to start the conversations now," Beshear said.

Beth Musgrave: (502) 875-3793. Twitter: @BGPolitics. Blog: Bluegrasspolitics.bloginky.com.

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