Franklin County

House Republicans draft tax reform proposal

Amid the financial worries and talk of state shortfalls, some House Republicans are suggesting that now is the time to eliminate the state's corporate and individual income taxes.

Not only that, but they're also calling for dropping the sales tax from 6 cents to a nickel on every dollar of goods purchased.

So how will taking away all that revenue stabilize the shaky status of the state's coffers?

The legislation drafted by Reps. Bill Farmer of Lexington and David Floyd of Bardstown would replace the income tax by spreading the sales tax to a host of services that are currently exempt, including plumbing, roofing and other contracting work, and some consulting work.

Work performed by doctors, lawyers and accountants, however, would remain untaxed, Farmer said.

Another huge chunk of change would roll into the state's bank account by charging 5 percent tax on rent paid for commercial — but not residential — real estate space, according to the 66-page bill.

"The state of Kentucky doesn't tax non-residential real estate. There's no exclusion; we just don't tax it," Farmer said. "It would be a huge source of revenue."

Farmer claims that applying a 5 percent tax rate to that rental income and those services would cancel out the more than $4 billion the state brings in each year through the personal and corporate income tax. But that hasn't been independently verified yet.

The Legislative Research Commission staff's initial estimate of how much the state would collect by taxing commercial rent payments came back with just one word: "substantial," Farmer said.

So Farmer requested that legislative staffers work up the financial data to get an actual dollar figure, which could come as early as next week.

Right now, if investment firms or building owners that rent out office and retail space bring in less than $3 million in gross annual profits, their total state tax bill would be $175. That's the state's alternative minimum tax amount.

Farmer's proposal also would tax rent paid on billboard space and for income received by telecommunications companies that charge other firms piggybacking off their telephone poles or cell phone towers.

And, under the proposal, Kentucky would collect taxes on charges that stores such as Kroger and Wal-Mart impose on product makers to have special displays at the end of their aisles.

The first draft of the bill, which has been filed in advance of the 2009 General Assembly session that begins Tuesday, is the most sweeping proposal to rework the state's revenue system that has been offered so far.

It comes at a time when the state faces a $456.1 million shortfall this fiscal year, which ends June 30.

Farmer, who owns HTI Tax Service in Lexington, said it's unlikely that the overhaul he's proposing would erase that deficit.

"Nothing is going to bring in the kind of money we need immediately," he said. "Half a billion dollars in this state in this economy — it ain't gonna happen."

But, he said, spreading the sales tax to services — a sector of the economy that's been growing at a much faster rate than manufacturing — is a matter of long-term stability.

Other Republicans agree.

"If ever there's a time to take a hard look at the tax code in Kentucky, I think now would be it," said Republican House whip Stan Lee of Lexington, who had considered filing similar legislation and now supports Farmer and Floyd's bill. "Hopefully, House leadership will think so."

House Speaker Jody Richards, D-Bowling Green, said it's unlikely such a sweeping change will be adopted this year, especially considering that the 2009 General Assembly is a 30-day session, half as long as sessions in even years. And because of legislative rules, a revenue-generating measure proposed in a short session needs approval of three-fifths of each chamber instead of the usual simple majority.

"It's a form of tax modernization or reform, but I think it would have a hard time," Richards said. "We have been an income tax state for a long time, and it's been a stable source of income for this state."

Income taxes account for nearly half of Kentucky's almost $9 billion annual budget. In contrast, the state receives about $3 billion from sales and use taxes, according to the state budget office.

Nine states, including neighboring Tennessee, don't charge state income tax, according to the Internal Revenue Service.

It could take several sessions as "an education period" before enough lawmakers might buy into such an approach, Richards said.

"But it's a proposal worth looking at," he said.

Rep. Greg Stumbo, D-Prestonsburg, who is challenging Richards for the speakership in Tuesday's House leadership elections, also said Farmer's bill has little hope of passing in '09.

"It's not got any traction right now," he said. "I think a one-cent increase in the sales tax is (politically) easier than extending it to services."

To help plug the immediate $456.1 million hole in this year's budget, Democratic Gov. Steve Beshear proposed last month an increase in the tax on tobacco products, including bumping the cigarette tax from 30 cents to $1 a pack.

But he has repeatedly said he's willing to consider any other proposals, and he told Farmer that in mid-December when they met to discuss the bill, Farmer said.

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