Politics & Government

With one-third of legislative session gone, Beshear set to offer complex tax-overhaul plan

"We're going to be looking at the rates that folks pay in income taxes and in corporate taxes," Gov. Steve Beshear said.
"We're going to be looking at the rates that folks pay in income taxes and in corporate taxes," Gov. Steve Beshear said. AP

FRANKFORT — With this year's state legislative session nearly one-third complete, Gov. Steve Beshear said he plans to unveil next week a complex plan to overhaul Kentucky's tax laws.

Beshear said Friday during a speech in Lexington that his plan will have "a lot of moving parts" and indicated that it would alter income taxes paid by individuals and corporations; expand the sales tax to some services; and change how the bourbon industry is taxed.

The Democratic governor plans to meet with House and Senate leaders of both parties on Monday to share his tax plan, House Speaker Greg Stumbo, D-Prestonsburg, said Friday.

In a speech Friday, Beshear stressed that his plan will not be about creating more money for state government.

"This is about making us more competitive," he said.

"We're going to be looking at the rates that folks pay in income taxes and in corporate taxes, because some of our surrounding states have lower rates than we do," Beshear said. "We're going to be looking at the sales tax" and considering spreading it "to some services. Not raising, but spreading, so that as our economy grows here in this state, which is now more of a service economy, that our revenues will grow."

Whatever Beshear proposes, it will come more than a year after a "blue-ribbon commission" he appointed in 2012 delivered a 453-page report with scores of recommendations, such as taxing more of retirees' pension incomes, taxing some services, and raising the tax on a pack of cigarettes from 60 cents to $1. Taken as a whole, the proposals would have added $659 million annually to the $9.5 billion General Fund.

Unless taxes are raised or spending is slashed still further, Kentucky is on track to face a $1 billion annual deficit by the year 2020, University of Kentucky economists warned the tax-reform commission.

Stumbo said he has not seen Beshear's plan but has "an open mind" about it. Still, Stumbo said he's skeptical that any significant change in the tax code can move through the legislature at this point, given that Tuesday will mark the 20th day of the 60-workday session, which runs through mid-April.

"I think it's got an uphill struggle," Stumbo said. "The session is a third over, basically, and I always point to the last time the General Assembly did anything with taxes and tax reform, and that time we spent a year — the year of 1989 — traveling across the state and talking about the issue of education and more revenues for education.

"And I think that's sort of the format you need to have."

In addition, the General Assembly still must craft a two-year state budget this year, based on a proposed budget Beshear released last month.

Senate President Robert Stivers, R-Manchester, said he does not support tax increases but believes sufficient time remains in this year's legislative session to "make some tax reforms."

He noted that the state legislature last year approved major changes in the state's pension systems in 26 days.

If tax reform can't be accomplished in this year's regular session, Stivers said, "it may be in a special session this year or next year's session." Only the governor can call lawmakers into special session and set its agenda.

Stivers said he has a particular interest in changing the ad valorem property tax on aging bourbon barrels and income tax rates on corporations and individuals.

Stumbo said he is most enthusiastic about a recommendation from Beshear's tax-reform commission for a state-level, refundable Earned Income Tax Credit for low-income Kentuckians.

Stumbo said he's not interested in more corporate tax breaks, either for businesses in general or for targeted industries that have powerful lobbying forces.

"I don't know why that you want to give more tax breaks or incentives to companies that are doing well, and it appeared to me that some members that were on that (tax-reform) commission may have jockeyed for those provisions to help their own businesses," Stumbo said.

The General Assembly "needs to be very careful about any sort of breaks or incentives that it gives to companies," he said.

Any tax breaks that do gain approval should contain a so-called "sunset clause" that requires them to be periodically examined and re-approved, Stumbo said.

"We've really incentivized our tax code to the point where we're giving away more money than we're taking in, and some of these things are 20 or 30 years old," he said. "They need to be looked at and reviewed again."

Ideally, Stumbo said, he would like to abolish all corporate tax breaks, then let industries come to Frankfort one by one and prove to a majority of lawmakers that they still need the breaks and that the state is getting some fair return on the revenue it is losing.

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