FRANKFORT — A House committee approved a measure late Wednesday to raise $371 million in new revenue during the next two years, the first step toward approving the Democratic-led chamber's version of the state budget.
The bulk of the revenue to help balance the budget comes from two big items — accelerating sales tax collections in the second year of the budget and suspending for two years a tax provision that lets businesses deduct net operating losses over 20 years.
The acceleration of sales tax payments would generate $90 million in the second year of the budget — which begins July 1, 2011. Not allowing businesses to deduct losses for two years would generate $187 million.
The House Appropriations and Revenue Committee voted 17-11, largely along party lines, to approve House Bill 530.
The House is expected to take up a separate bill next week that would spend the new revenue as part of a possible $18 billion, two-year General Fund budget.
House Democrats defended the plan at Wednesday's meeting, saying the revenue allows them to avoid draconian budget cuts.
"We are going to be able to escape this biennium with minimum pain to education and human services if we have the revenue that's available in this bill," said Rep. Harry Moberly, D-Richmond. "There will be a little pain for everybody."
House Republicans balked at the plan, saying that now isn't the time to tweak the tax bills of hurting businesses. Leaders in the Republican-controlled Senate also have expressed concerns about the business tax changes, which could create disagreements in later budget negotiations.
House Minority Leader Jeff Hoover, R-Jamestown, said companies rely on the tax break from net operating losses during bad economic times.
"To tell them it's suspended for two years, it's just a terrible time to do that," Hoover said.
But House Budget Chairman Rick Rand, D-Bedford, and other Democrats have said the proposals shouldn't hurt businesses because they can take the deduction over the following 20 years.
Representatives of the Kentucky Chamber of Commerce and other business groups met with House leadership Wednesday to express concerns about suspending the net operating loss deduction.
Retailers also have complained to Republicans that accelerated sales tax payments would place an extra burden on small businesses, Hoover said.
"They just think from a logistics standpoint, it's going to be difficult for them. And that particularly hits your smaller businesses and those that, I think, can least afford more burdensome regulations," he said.
The House revenue proposal also includes changes to health insurance for state employees and addresses escalating costs in Medicaid and the Department of Corrections.
The state chamber and other business leaders have raised concerns about those areas in the past, but now the business community doesn't want to share in the responsibility of balancing the state's books, Rand said.
"We've gone everywhere ... and nearly every agency has said, 'We know that you have a tough job, we want to be part of the solution," Rand said. "The last place we went was to business.
"I'm a little bit disappointed that they haven't come to us with any solutions."
Others, such as Rep. Scott Brinkman. R-Louisville, had problems with HB 530 because the committee has not seen how House leaders are proposing to spend the cash.
Rand said there could be a $220 million carry-over, or surplus, in the first year of the budget and possibly additional extra money in the second year. But because final cuts to agencies are still being worked out, its not clear how much carry-over money there will be, Rand said.
House leaders have said they want to put some money in the state's rainy day fund, which has been depleted by previous rounds of budget cuts.
The two-year budget has a projected shortfall of more than $1.2 billion — roughly $375 million in the first year and $750 million in the second.
The state is looking at chopping two school days, cutting spending at many state agencies by about 2 percent and a host of other cost-cutting measures to make up the shortfall, Rand said.
Other revenue provisions in HB 530 include a short-term elimination of penalties and interest on disputed tax bills and capping a film industry tax credit approved last summer.
Allowing those who have appealed their tax bills to avoid paying interest or penalties for past-due taxes could generate an additional $11.3 million, according to House budget figures.