FRANKFORT — State lawmakers approved a passel of tax breaks for businesses this week with little public discussion, providing potentially lucrative benefits for a proposed 21c Museum Hotel in Lexington, the state's bourbon and beer industries, startup companies and more.
House Bill 445, a revenue bill that accompanied the state's two-year budget, also makes several gambling-related changes, including a new tax on advance-deposit wagering and reinstituting a tax on instant racing machines. It also allows the Kentucky Lottery to advertise that its proceeds help finance education and other government programs.
Overall, the revenue bill means less money for the state.
Senate President Robert Stivers, R-Manchester, said the bill would cut revenue for the state by about $9 million to $10 million, mostly in the second year of the two-year, $20.3 billion budget lawmakers approved Monday. Gov. Steve Beshear has several days to decide whether to veto any of the revenue and spending measures, which lawmakers could attempt to override when they return on April 14 and 15 for the final days of this year's legislative session.
Some of the provisions in the bill were in a tax-reform package recommended last year by a task force Beshear created.
Here's a closer look at some of the revenue bill's key provisions.
The bill includes a multi-million dollar perk for anyone who might be on the cusp of spending big money to renovate historical buildings in Lexington and Louisville, such as the proposed 21c Museum Hotel in Lexington or the Whiskey Row development in Louisville. Brown-Forman heiress Laura Lee Brown; her husband, Steve Wilson; and attorney Craig Greenberg are behind both projects.
"We are supportive of this legislation, as well as the other ongoing efforts to improve and clarify the state's historic tax credit program," Greenberg said Wednesday. "Historic-restoration projects are proven to create good jobs, generate new taxes for city and state governments, and revitalize communities. This program provides a positive return on investment for the state."
Lawmakers approved a credit for as much as $6 million per project, spread over four years, for historical rehabilitation in consolidated local governments or urban-county governments, within a half-mile of a tax increment financing development area that has received at least preliminary approval, as long as substantial rehabilitation of a certified historical structure begins before July 1, 2015.
All of downtown Louisville and most of downtown Lexington are in or near such development areas and might qualify for the tax break.
Any entity that meets the criteria and spends at least $15 million can get as much as 20 percent back in a refundable, transferable tax credit that could be sold. (A developer could get 30 percent back.)
The expenses eligible for the tax credit are capped at $30 million, but each project that spends that much could get $6 million back, regardless of whether the rehabilitator pays any taxes, making it a particularly attractive tax break for developers.
The tax credit is expected to cost the state at least $3 million annually for the next four years and possibly much more, depending on how many other projects are able to qualify.
Under the revenue bill, the state will, for the first time, tax advance-deposit wagering, which includes online gambling sites that accept wagers on horse races once the bettor's account has been funded. Players bet through accounts at sites including TwinSpires.com and TVG.
Total betting on horse racing in general has been declining in recent years, but advance-deposit wagering has been growing.
In 2013, more than $153 million was wagered by Kentucky residents who had such accounts. None of it was taxed.
Beginning Aug. 1, Kentucky will impose an excise tax of 0.5 percent, which the Legislative Research Commission estimates will generate $90,000 in fiscal year 2015 and $100,000 in fiscal year 2016. However, only 15 percent of the revenue generated will go into the state's general fund. The rest will be returned to racetracks, with half of that mandated to go into race winnings.
The bill also fixed a problem created when the Kentucky Supreme Court ruled in February that the Revenue Department did not have the authority to tax instant racing, in which players bet on slots-like machines.
The state had collected more than $9 million through the end of February. Most of that money was dedicated to equine industry-related funds, including the purse-boosting development fund, equine industry programs at universities, and equine drug research.
Language in the bill retroactively taxes those instant racing wagers at the same rate it was imposed and collected. After April 1, instant racing will be taxed at 1.5 percent, with the amounts going into industry funds capped near their current levels.
For calendar year 2013, Kentucky Downs and Ellis Park had a combined $319 million in wagering on instant racing machines. Keeneland and The Red Mile, both in Lexington, received instant racing licenses Wednesday that would triple the number of machines in use in Kentucky. If the revenue projections also triple, instant racing alone could generate nearly $9 million for purse funds.
The remainder goes into the state's general fund, which also could see a significant increase from the $1.12 million received in 2013.
Bourbon and beer
The state's booming bourbon distilleries also won a break worth millions from taxes levied on aging bourbon barrels.
It offers distilleries a corporate income tax credit against the amount of barrel taxes paid — with a requirement that distilleries reinvest that money in their Kentucky operations.
Stivers said the measure should lead to expansions of distilleries in the state and keep them in Kentucky.
The credit will be phased in over five years, starting in 2015. The provision is expected to cost the state $2.8 million in the second year of the two-year budget. The projected impact when fully phased in is about $14 million a year.
"We are appreciative that the General Assembly recognizes our signature bourbon industry as a major economic development engine of the commonwealth," Kentucky Distillers' Association president Eric Gregory said in a news release. "This reinvestment tax credit will allow our distilleries to create more jobs and increase investment in the state."
Kentucky is the only government that taxes aging barrels of spirits, Gregory said.
Beginning in fiscal year 2016, the revenue bill also lowers the wholesale tax rate on beer and wine by 0.25 percent a year until the rate drops from 11 percent to 10 percent.
This change will cost the state $1.6 million in fiscal year 2016. When fully implemented, its cost to the state will be about $7 million a year.
The state expects to get a $3 million boost over the next two years by lifting a provision that had stopped the Kentucky Lottery Corp. from mentioning in advertising that its proceeds benefit education programs.
More people are expected to play the games if they know the proceeds pay for college scholarships.
"We want everyone to know how important lottery proceeds are in providing scholarships to Kentucky students," lottery spokesman Chip Polston said.
The provision is projected to generate $1 million for the state in the first year of the two-year budget and $2 million in the second year.
The legislation creates a so-called "angel investor" tax break, with income tax credits allowed for qualified investments in approved startup companies.
Northern Kentucky lawmakers and businesspeople have clamored for the tax credit for years, saying it would help stem the region's loss of startup businesses to Cincinnati, said Senate Majority Leader Damon Thayer, R-Georgetown.
It is expected to cost the state $2.5 million in the second year of the budget and an expected $3 million every year after that.
New markets tax credit
This credit is to spur revitalization of low-income and impoverished communities. The revenue bill increases a cap on the program from $5 million a year to $10 million.