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Stumbo asks legislators for tax reform plan

FRANKFORT — After years of little movement, a push to overhaul Kentucky's tax structure and possibly correct the state's perennially unbalanced checkbook is gaining steam.

House Speaker Greg Stumbo has asked key legislators who have been pushing for a retooling of the tax system to come up with a proposal that could be considered this legislative session, potentially as a solution to a possible $1.5 billion shortfall in the next two-year state budget.

Lawmakers have known for years that the state's checkbook is unbalanced. Since 2000, the General Assembly has spent about $3.6 billion more from the General Fund than the state collected in revenues.

A major cause of the cash crisis is that revenue from key taxes has not kept pace with growth in the economy, which has become increasingly dominated by largely untaxed service industries.

The group of lawmakers tapped by Stumbo, D-Prestonsburg, will likely merge two key pieces of legislation that would tweak the state's tax code.

Rep. Jim Wayne, D-Louisville, has pushed legislation for nearly a decade that would expand taxes on some services and include some tax increases on those at the top of the tax bracket. Wayne's bill also includes an earned income tax credit, which would benefit the poor. Rep. Bill Farmer, R-Lexington, has pushed a bill that would eliminate the state's income tax and expand the sales tax to include more services.

"I think it's really positive movement," Farmer said. "My understanding is that the speaker wants to be bold on this."

But Farmer and others who have pushed for reform remain cautious. It's unlikely that a major tax overhaul will be passed at the same time the legislature is trying to tackle a two-year budget with a possible shortfall of $1.5 billion, Farmer said.

Gov. Steve Beshear also has been lukewarm on tax reform and has made it clear he does not want any broad-based tax increases this legislative session. But President David Williams, R-Burkesville, has said he favors changing the tax code to a system that taxes consumption. He would eliminate the personal and corporate income taxes and move to a sales-tax model.

Stumbo said there is no deadline for a proposal but said he hopes it will be ready for discussion during this session, which is scheduled to end April 13. Stumbo said he hasn't set a revenue target that he would like an overhaul to generate.

"I don't think there is any harm in having things ready," Stumbo said. "I'm convinced that we could craft legislation which would provide incentives for the development of corporate business in Kentucky, provide middle-class tax relief and incorporate the earned income credit to help some of Kentucky's poorest families by spreading our tax base out."

Any tax overhaul would probably lower the state's 6 percent sales tax, he said.

Stumbo also said he supports "eliminating some of the useless and antiquated (tax) exemptions."

The Herald-Leader reported earlier this week that the state will forgo about $2.4 billion in various sales tax exemptions this fiscal year. For example, tax breaks to encourage utility companies and manufacturers to install now-mandatory pollution control equipment are projected to cost the state $113 million over the next three years.

The end goal of a tax overhaul is elasticity — "that revenues grow as the economy grows," Farmer said. Wayne, who has been looking at equity issues in the state's tax code for almost a decade, said that's his goal as well.

To accomplish that goal, some businesses that now pay nothing may have to start paying their fair share, Farmer said.

"We have to spread out the tax base so everyone's taxes will be lower," he said. "What we have to do is look at what's best for Kentucky going forward, and that's what's been missing in the past."

Rep. Harry Moberly, a Richmond Democrat and the former chairman of the House budget committee, has been asked by Wayne and Stumbo to help with the effort. Moberly could not be reached for comment Friday.

Wayne said Friday that the group is already studying some data to learn how much money the state would gain or lose by altering specific taxes.

"What we have to do now is to get more information," Wayne said. "This is something that's going to have be done with a great deal of care and a great deal of research. We need to consult with all of the various constituencies."

Still, speed is important, he said, predicting that a tax overhaul will have more traction with lawmakers after Jan. 19, when Beshear is expected to deliver a bleak budget plan for the next two fiscal years.

"My goal is to get things done as fast as possible because we're hurting right now," Wayne said.