FRANKFORT — Lawmakers plugged the state's projected $1 billion budget shortfall on Wednesday, but not before approving a passel of expensive tax breaks that Gov. Steve Beshear said would bring deeper cuts than planned to most state agencies.
The list of last-minute tax breaks inserted into the economic incentives bill includes an exemption of active-duty military pay from the state's income tax, a car trade-in benefit that will reduce taxes on new-vehicle purchases, and a tax credit of as much as $5,000 for those buying a newly built house.
Previously, Beshear had said that most state agencies other than Medicaid, higher education and the per-pupil funding formula for K-12 education would face 2.6 percent cuts. But the new tax breaks will "seriously and significantly increase those cuts," Beshear said.
The incentive programs added by lawmakers are likely to cost the state about $23 million in the fiscal year that begins July 1, said Jay Blanton, a spokesman for Beshear. In the following year, the cost of those programs and several others pushed by Beshear are expected to balloon to $84 million.
Beshear said he had asked lawmakers to delay the start of the new tax breaks until July 1, 2010, but they declined. The tax incentives that Beshear proposed won't start until then, hence the much higher cost to the state for the following year.
The military pay exemption, which takes effect Jan. 1, is expected to cost the state $18 million each year. Both the car trade-in program and the housing tax credit are capped at $25 million a year.
The car trade-in credit would be available on Sept. 1, but the housing credit takes effect 30 days after the bill is enacted into law, probably within a few days.
As the special legislative session ended Wednesday, Beshear said that he would sign the new tax breaks into law despite his concern about further program cuts because they were attached to a measure that includes two of his top priorities for the session. Those priorities were overhauling the state's existing economic-development programs and creating an authority to manage transportation mega-projects, including the $4.1 billion Ohio River bridges project in Jefferson County.
Beshear said he also intends to sign into law a compromise budget proposal approved unanimously by the General Assembly that will spend more than $740 million in federal stimulus money to help rectify the projected shortfall in the fiscal year that begins July 1.
Buy a car, house
State Rep. Harry Moberly, D-Richmond, said it was irresponsible of lawmakers to create the new tax credits without providing new revenue to pay for them. Eventually, he said, "we're going to have to reduce human services and education more because we didn't pay for it." Still, Moberly voted for the bill, which cleared the House, 86-10.
The Senate unanimously approved the measure. Most lawmakers dismissed predictions of future budget woes, saying the new programs would stimulate the economy and produce more tax revenue over the long haul. "If you weigh the impact of the whole package, it's very small in terms of the overall budget and it could be very large in getting us out of this recession," said House Speaker Greg Stumbo, D-Prestonsburg.
Backers of the tax exemption on military pay said it will probably create an economic boom around Fort Campbell in Christian County. The majority of those soldiers now live across the state line in Tennessee, which has no state income tax.
"They'll now stay in Kentucky and perhaps build a house in Kentucky and buy a new car in Kentucky," said Rep. Tommy Thompson, D-Owensboro, and the sponsor of House Bill 3.
The car trade-in tax break, which the General Assembly had never considered or debated before Tuesday, will jump-start the state's depressed auto dealerships, he said. Under the new guidelines, those who trade in a used car to buy a new or used car would pay sales taxes only on the difference between the value of the two vehicles.
Currently, new cars are taxed at their full value, with no consideration given to the value of any trade-in vehicle.
"Hopefully that will stimulate people to get off the fence and go buy a new car," Thompson said.
Batteries and buildings
The original purpose of Gov. Steve Beshear's proposed incentives bill was to streamline a confusing array of tax-incentive programs offered to businesses and to make information about those programs more accessible to the public.
The bill also makes the incentives offered to businesses that come to Kentucky more generous. Companies that invest more than $500 million would be eligible for up-front cash payments under the program, although the General Assembly is not providing any money to pay for that portion of the bill.
Other incentive programs in the bill include a roughly $1 million break on the state's pari-mutuel tax for tracks that lure a Breeders' Cup Challenge race and a tax break on renovation expenses at the Kentucky Speedway in Gallatin County if the track lands a NASCAR Sprint Cup Race. The measure also creates new tax breaks for expanding small businesses and film companies that produce movies in the state.
Lawmakers also tucked several economic-development provisions into the state budget bill, including a provision that would allow the University of Kentucky to use private money to build on-campus sports facilities and language that would allow the state to lease land to an advanced battery facility in Hardin County.
The General Assembly also tweaked Gov. Steve Beshear's proposed budget in several other ways, including:
■ Deleting a proposal that would require state employees to take unpaid holidays, a move that would have saved $10 million.
■ Adding funding for prosecutors and public defenders, including $1.2 million for commonwealth's attorneys, $1.1 million for county attorneys and $1.7 million for public defenders.
■ Adding $2.1 million to the judicial branch budget and $3.5 million to the legislative branch budget.