Kentucky lawmakers approved a tax bill Wednesday that will cut revenue by $105 million, largely for banks, even as the state struggles to find money to pay down its $37 billion pension debt.
The House and Senate signed off on the tax changes the same day the Senate approved a bill that would cost the state up to $1 billion as lawmakers provide relief from rapidly growing pension costs to some Kentucky universities and quasi-governmental agencies. By passing the tax bill Wednesday, lawmakers will be able to override a possible veto from Governor Matt Bevin.
“It does create a challenge,” said Sen. Chris McDaniel, R-Taylor Mill. “The fact is, the pension contribution is eating every other aspect of state government out. But at the same time, if we become economically uncompetitive with our tax policy, 65 percent of our people and business sit on a border... If we begin to lose our jobs, our businesses and the tax base that comes with those, we will find ourselves uncompetitive in the long run.”
Kentucky banks were at the top of McDaniel’s mind.
Kentucky uses a formula that taxes banks based on the capital they have on hand called the bank franchise tax. But with the 2010 passage of the federal Dodd-Frank Act to address some of the causes of the Great Recession, banks have had to keep more capital on hand.
From 2010 to 2011, the amount Kentucky collected from the bank franchise tax jumped from about $70 million to about $90 million. Under the new bill, banks would have to pay corporate income taxes instead.
While the bank franchise tax has remained relatively steady over the past five fiscal years — it’s been around $100 million a year — lawmakers have argued that banks are beginning to move out of Kentucky to avoid paying the tax.
In a floor speech, House Speaker David Osborne said 37 Kentucky banks have left the state in the past five years because they were taxed too high.
“Leading means taking chances,” Osborne said before the House gave the bill final passage late Wednesday. “And I will defend the decision to put the bank franchise tax in here, because I will tell you, the people who lost their jobs at the First Community Bank of Prestonsburg are not wealthy millionaires who are reaping the benefits of this tax bill.”
It was a sentiment supported by leading Democrats Wednesday morning.
“It’s more important to think about this as a Kentucky community bank equity act,” said Senate Minority Floor Leader Morgan McGarvey, D-Louisville. “This does not apply to the big banks as I understand it. It does not go to a J.P. Morgan Chase or a PNC. The way these banks work, these community banks, if you’re a Kentucky chartered bank you’re subject to what is the highest tax rate of any community bank system in the country.”
That change will cost the state about $56 million a year.
“Those are all balancing acts that we have to maintain,” said House Speaker David Osborne, R-Prospect. “When we have an industry that is leaving some of the more rural areas of the state, some areas that are already struggling economically, I think that we have to consider the impact of any policy changes we do or any policy changes we make.”
Lawmakers presented HB 354 to “clean-up” some of the changes they made in their tax reform bill last year, in which they implemented a flat 5 percent income tax and expanded the sales tax to include some services.
Among other changes, the bill also provides a two-year tax credit for low income people who saw a tax increase because of the 5 percent flat tax and it exempts charitable organizations from having to pay a sales tax on admissions to their charitable events.
But it comes at a time when the state’s already large pension liability is likely to increase. Some of the state’s universities and local health departments, mental health/mental retardation boards, state-administered retirement systems, domestic violence shelters, rape crisis centers and child advocacy centers, are facing the prospect of bankruptcy because of higher pension contributions expected by the state.
To provide relief, the Senate bill will allow them to opt-out of the Kentucky Retirement Systems and pay back the money they owe for existing employees on a payment plan that could last up to 50 years.
A recent analysis by the Kentucky Retirement Systems said the plan will cost the state $1 billion. McDaniel said that is an overestimate because, without relief, some of those agencies will likely face bankruptcy and wouldn’t make their pension payments anyway. He estimates the cost is closer to $500 million.