Tax overhaul may be gaining steam

FRANKFORT — House leaders said Monday that they plan to hold hearings on two tax overhaul bills soon in preparation for a possible special legislative session this summer.

Rep. Rick Rand, D-Bedford, chairman of the House Appropriations and Revenue Committee, said Monday that hearings on the bills as well as other discussions about the condition of the state's finances could take place as early as late April.

"The prospects for our next budget cycles are not rosy," Rand said. "We want to make sure that we are prepared to make any decisions that we may have to make."

The General Assembly just adjourned Thursday. But talks of tackling tax reform — or looking at the way Kentucky generates revenue — started early in the 2009 session after the General Assembly passed a combination of spending cuts and increases in cigarette and alcohol taxes as a way to plug a $456 million shortfall. Many legislators, in speeches on the floor and privately, said the state could no longer balance its books on the backs of just a few industries.

And many say next year's budget shortfall could be even greater as the state's revenues continue to decline. Gov. Steve Beshear said last week that he has not yet decided whether to call a special session to address a potential shortfall.

The legislature has kicked around tax reform since Gov. Paul Patton's tenure in the 1990s, but the idea gained steam when a 2002 report showed that Kentucky's tax structure was unsound — meaning it did not raise enough revenue to support the services the state had in place. The state uses a tax structure more suited to the industrial age and did not address or tax the growing service sector, the study found.

Under Gov. Ernie Fletcher, the state made some changes to the tax code in 2005, but some say it didn't go far enough.

Reps. Jim Wayne, D-Louisville, and Bill Farmer, R-Lexington, filed bills during the session that call for major changes in the way the state taxes and generates revenue.

Farmer and Wayne said they are optimistic that the state may finally tackle the thorny issue of overhauling the tax system because the state's finances are in such dire shape.

Farmer, a conservative, said he thinks Wayne's proposal has helped give his bill more traction.

"You have two people that are pretty much polar opposites that are calling for major revisions of the tax code," said Farmer. "I think a lot of people are starting to think, 'Maybe this really is an issue that we need to address.'"

Farmer's bill includes doing away with the state's individual and corporate income tax and moving to a sales tax system. Wayne has proposed making taxes more equitable. The wealthiest Kentuckians pay the least in terms of percentage of their salaries, Wayne said. His bill includes a slight increase in taxes for the wealthiest citizens. Both bills call for more taxes on the service industry.

Another measure gaining traction is House Speaker Greg Stumbo's proposal to place electronic slot machines at racetracks. The move, Stumbo and supporters say, could generate as much as $350 million a year in additional revenue.

Rand said his panel had not decided if slots also would be discussed at the hearings about tax reform and revenues.

Any bill would have to get past the Republican-controlled Senate, which has traditionally shied away from any new taxes.

Senate President David Williams, R-Burkesville, said House leaders have not spoken with him about Farmer's or Wayne's proposal. But Williams didn't rule out looking at tax reform.

"Obviously, tax reform is on everyone's minds," Williams said.