Beshear proposes 22 tax changes to raise $210 million a year for Kentucky

jbrammer@herald-leader.comjpatton@herald-leader.comFebruary 4, 2014 

  • Reduce individual income tax rates.

    Impact: -$180.1 million

    Create a refundable earned income tax credit for low-wage workers.

    Impact: -$72.75 million

    Create tax breaks for some of Kentucky's signature industries, including horses and bourbon.

    Impact: -$49 million

  • Other proposed tax changes and their financial impact

    • Change the way multi-state businesses calculate their corporate income tax; -$154.5 million

    • Lower the top corporate income tax rate from 6 to 5.9 percent; -$6.4 million

    • Create an "angel" investor tax credit for certain investments in small businesses; -$3 million

    • Expand the state's research and development tax credit; -$4 million

    • Double the New Markets Tax Credit, a credit for people or businesses that buy a qualified investment from a community development agency; -$5 million

    • Exempt inventory from state property taxes (merchant's inventory, manufactured finished goods, and goods stored in warehouse); -$7.2 million

    • Eliminate state taxation of certain classes of property, in part because they cost more to collect than they generate. Examples are motor vehicles held for sale by dealers and non-commercial aircraft and watercraft; -$5 million

    • Create an income tax credit for bourbon producers that reinvest in facilities and equipment; -$13.3 million

    • Exempt the sales and use tax on certain equine products, making them taxed similarly to all other livestock; -$14.8 million

    • Exempt the sales tax on pharmaceuticals for food animals; -$4.8 million

    • Reduce the 11 percent wholesale tax on beer, wine and distilled spirits to 10 percent; -$16 million

    • Repeal the distilled spirits case sales tax; -$100,000

    • Increase the tax rate on cigarettes from 60 cents to $1 a pack, and on other tobacco products commensurate to the proposed cigarette tax increase, and tax e-cigarettes at 20 percent of their value; +$124.5 million

    • Restore tax on cigarette rolling papers; +$800,000

    • Clarify that the sales tax is applicable to all prewritten software, regardless of method of delivery; +$5 million

    • Make clear that all amounts paid for staying in a lodging room in Kentucky, including amounts charged by online travel companies for their services, are subject to sales tax and transient room taxes; +$4.7 million

    • Phase out the $10 individual income tax credit, a credit created in 1960 at $20 but lowered to $10 last year for every taxpayer regardless of income; +$32.8 million

    • Eliminate option for married couples to file separately on a combined state tax return. This would affect 430,000 filers; +$72.8 million

  • Tax plan highlights

FRANKFORT — Saying Kentucky has been held back by an "archaic" tax code, Gov. Steve Beshear unveiled 22 proposed tax changes Tuesday that would raise an estimated $210 million a year for the state when fully implemented.

The Democratic governor's proposal includes a mixture of tax increases and decreases.

The largest money-generators for the state include expanding the 6 percent sales tax to selected services, increasing the tax on cigarettes from 60 cents to $1 a pack, and reducing tax breaks on pension income for people whose annual gross income is more than $80,000.

The biggest money-losers for the state include a reduction in individual income tax rates, altering the complex formula used by multi-state companies to calculate their income tax liability, establishing an earned-income tax credit for low-wage workers, and creating tax breaks for some of Kentucky's signature industries, including bourbon and horses.

Most of Beshear's plan is pulled from some of the recommendations made by a tax-reform commission he set up in 2012. It was led by Lt. Gov. Jerry Abramson. Altogether, those recommendations would have added $659 million annually to the $9.5 billion general fund.

Beshear said he is aware that the political climate for debating tax changes is difficult this year, when all 100 House seats and 19 of the Senate's 38 seats are up for grabs. Republicans are trying to gain control of the state House for the first time since 1921.

Because of his desire to avoid making tax reform "a political football to be used by our political parties in the upcoming elections," Beshear said he won't ask either chamber to vote on his tax bill unless a consensus has been reached by a majority in the House and Senate.

House Appropriations and Revenue Chairman Rick Rand, D-Bedford, said he will sponsor the bill and his committee will start holding hearings on it next Tuesday. Rand declined to say if he would vote for the measure, describing it as "a starting point."

He quickly added that he is aware of the financial problems facing lawmakers as they craft a two-year state budget. Last month, Beshear proposed a budget that would boost spending on K-12 education but cut about $100 million from many other areas of government, some of which will have lost 41 percent of their funding since the economic recession of 2008.

House Minority Leader Jeff Hoover, R-Jamestown, called on House Speaker Greg Stumbo, D-Prestonsburg, and Senate President Robert Stivers, R-Manchester, to appoint a "small" group of lawmakers to negotiate an agreement on "comprehensive tax reform."

"The subject of tax reform and the positive results it could produce for the commonwealth is far too important for us to either let languish for another year or with which to play petty political games," Hoover said in a letter to the two top legislative leaders.

Stumbo did not say yes or no to Hoover's request but noted that such a panel would have to contain legislative leaders and key committee chairs.

Stivers said Hoover's request "goes to the reality that people need to know that Republicans and Democrats alike are serious about the process." He did not elaborate.

Stumbo and Stivers had different takes on parts of the governor's tax plan.

Stumbo said he likes the idea of creating an earned-income tax credit and has no problem with raising the cigarette tax. He said he is "skeptical" about some of the proposed tax breaks and that it is "too early to tell" about expanding the sales tax to some services, such as auto repair, landscaping, fitness centers, amusement parks and boat dock rentals.

Stumbo specifically questioned giving tax breaks to the bourbon industry, which he said is "making record profits."

Stivers said there are parts of the governor's plan that the Republican-led Senate favor and parts "we don't particularly care for."

He said tax changes that help businesses grow will be viewed "more friendly" in the Senate than tax hikes.

Stivers said he would like to help the bourbon industry, "an industry that is expanding with numerous employees that would be easily transient across the river to where they could store and age their product without being exposed to the taxes."

"We want them to stay here and reinvest to put more people to work," he said.

Stivers said the proposed cigarette tax increase could be "a good thing" for the health of Kentuckians but is based on "a flawed premise" because it would lead to lower sales and less tax revenue overall.

Reaction to Beshear's plan, as most issues discussed in Frankfort, primarily depended on how it would affect one's interests.

Eric Gregory, president of the Kentucky Distillers' Association, said the trade and lobbying group is glad to see Beshear propose relief from the bourbon-barrel tax.

"Kentucky is the only place in the world that levies a tax on aging barrels of spirits and that puts our distilleries at competitive disadvantage in the global marketplace," he said.

Gregory said the tax credit would be an incentive for further expansion of Kentucky's booming bourbon industry, which would create more jobs, more bourbon, and a bigger local tax base.

"We have distilleries, new craft distilleries, bypassing Kentucky because of this tax," Gregory said.

Rob Morris, president of Lowell's Independent Automotive Inc. in Lexington, said expanding the sales tax to auto repair work would "hit our poorer customers harder than our wealthier ones — since a greater portion of their overall income generally goes toward car repairs."

Morris noted that Beshear's plan "also includes a series of tax breaks for the most profitable businesses" and businesses in specialized industries.

Calling the sales-tax proposal "pretty regressive," Morris said a proposed 0.1 percent drop in the corporate income tax rate would "just line some business owners' pockets" without creating jobs.

Dave Adkisson, president of the Kentucky Chamber of Commerce, said Beshear has provided "a strong starting point for discussions of tax reform."

"We're pleased that the governor is emphasizing competitiveness," Adkisson said. "The Chamber's top priority is making Kentucky competitive so our industries — large and small — can create more jobs."

Terry Brooks, executive director of Kentucky Youth Advocates, said Beshear's plan is "a step in the right direction for Kentucky kids and families."

He said his group was especially pleased with the earned-income tax credit.

"We know a state Earned Income Tax Credit gets and keeps people working and is a proven way to help lift families out of poverty," Brooks said.

About 424,000 Kentuckians would qualify for the credit, which would average $171.50, Beshear said.

Jason Bailey, director of the Kentucky Center for Economic Policy, said Beshear's plan "contains some good ideas" but raises only one-third of the new revenue proposed by the tax-reform commission.

Economic growth in Kentucky will not hinge on lower business taxes, he said, but rather "our ability to afford critical public investments in education, health and other areas that the state has neglected for too long."

Jack Brammer: (502) 227-1198. Twitter: @BGPolitics. Blog: Bluegrasspolitics.bloginky.com.

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