Can Bevin turn the ‘sacred cows’ of Kentucky’s tax code into hamburger?
On the legislature’s final day of business in 2019, lawmakers swiftly put together a batch of new corporate tax breaks and corrections to perceived mistakes they included in their previous tax break bill, just signed into law this week by Gov. Matt Bevin.
House Bill 458, as rewritten Thursday morning by the Senate budget committee, will allow more deductions for corporate income taxes owed by multi-state and multi-national companies. These businesses are covered by the “combined reporting” model the state adopted last year to reduce tax avoidance by companies that shift their income across borders between related entities to find the lightest tax rate available.
The bill will create a loss to the state treasury, but nobody yet knows how big a loss, Senate budget committee Chairman Chris McDaniel, R-Latonia, told reporters after the hearing.
“We don’t have any data on it yet. It’s strictly an economist’s guess as to what that will be as it goes forward,” McDaniel said.
Late Thursday night, senators put the estimated cost of the bill at $3.5 million and rushed a second bill behind the first to transfer that sum from the state’s rainy day fund into the General Fund to cover the loss.
In the tax break bill previously passed by lawmakers, the state is estimated to lose $106 million a year.
Senate Minority Leader Morgan McGarvey, D-Louisville, opposed the new tax break bill, saying he didn’t have time to adequately review it.
“For the — now — third time in two years, we are handed a tax bill late before getting a chance to really read it and digest it before voting on it,” McGarvey said.
The Senate and House later passed the tax bill, although the House made a floor amendment to drop two sections that would have inadvertently cost the state between $15 million and $16 million, House budget Committee Chairman Steven Rudy, R-Paducah, told his colleagues.
Several Democratic representatives said they were appalled that a bill being rushed through on the session’s final night had such an error in it.
“I count this as our third tax clean-up bill this session,” Rep. Joni Jenkins, D-Shively, said. “Folks, people at home are aghast at things that go on here.”
Originally, House Bill 458 was a minor tax bill sponsored by Rudy, who had pledged to his House colleagues that it would not be used at session’s end for anything other than “technical corrections.”
“We’re not sliding anything in,” Rudy said earlier this month as he convinced the House to vote unanimously for his bill. “If the Senate chooses to do so, we will not concur and I will not be a part of it. I promise you, my word as chairman of this committee, this is just in the case for additional cleanup should all the parties agree to it.”
However, at a last-minute hearing Thursday morning, the Senate budget committee completely rewrote HB 458 to make a number of changes. Apart from the corporate income tax breaks, the changes include:
▪ The elimination of a new exemption that lawmakers just created in the Kentucky Open Records Act that would shield certain kinds of tax documents held by the state Revenue Department. The legislature tucked that exemption into their previous tax break bill, House Bill 354, without publicly disclosing it, but the Herald-Leader reported on it after the bill’s final passage.
On further reflection, the new open records exemption was “problematic,” McDaniel said.
▪ Language clarifying that local governments’ franchise tax on bank deposits was not repealed by HB 354. That earlier bill — at the urging of the Kentucky Bankers Association — repealed the state’s bank franchise tax on deposits and replaced it with the lower corporate income tax, at an estimated cost to the state treasury of $56 million a year.
The Kentucky League of Cities and the Kentucky Association of Counties, fearing a local revenue loss, lobbied for the fix.
“When I was driving home, I realized — I think we all realized — that this might be the unintended consequence of what we’d call a drafting error,” said Sen. Robin Webb, D-Grayson.
▪ The contents of House Bill 62, which creates an income tax checkoff option for the Kentucky YMCA Youth Assembly program. The bill failed to make it through the legislative process in time.
▪ Removal of the “sunset” provision in HB 354 that would have prevented the state from accepting new applications for tourism development tax credits for projects after July 1, 2020.
“There’s a lot of good tourism projects that are in the pipeline around the commonwealth that are counting on that,” McDaniel said. “So we went ahead and lifted that sunset so we could make sure those projects could continue.”