Gov. Steve Beshear wants to raise about $210 million in extra revenue each year by making changes to an “archaic tax code which was developed for the 20th century economy” but is now holding back Kentucky.
Most of the money would come from applying the 6 percent sales tax to some services, primarily on repairs to personal property, including automobiles, some recreational services like golf courses and country clubs and some residential and personal services like lawn care, janitorial services and security systems. That would generate $280 million in new revenue.
The governor also wants to increase the cigarette tax to $1 and tax sales of electronic cigarettes, generating about $124 million. Reductions in other areas would offset some of the revenue gains, however.
Reaction was generally positive, although with reservations. Lawmakers seemed for the most part pleased Beshear put a proposal on the table and they can begin negotiating a final plan.
The plan would lower individual and personal income tax rates, by one-tenth of a percent for corporations and for the top income bracket. Individual brackets would be “compressed,” with anyone making less than $10,000 a year taxed at a 4 percent rate; those making between $10,000 and $50,000 at 5.5 percent; between $50,000 and $100,000 at 5.75 percent; and those making over $100,000 at 5.9 percent.
But while the lowest income levels would actually see a rate increase from 2 and 3 percent, Beshear said those would be offset by a refundable earned income tax credit of 7.5 percent of the federal credit. The changes in income tax rates would cost the state about $413 million each year.
Beshear would also reduce exemptions on retirement income for those with a gross income of $80,000 or more, eliminating it altogether for those making more than $100,000.
Some parts are designed to protect Kentucky’s “signature industries.” Beshear wants an income tax credit for bourbon distillers, sales tax exemptions on equine products, pharmaceuticals for food animals, and lower wholesale taxes on beer, wine and distilled spirits. It would reduce corporate taxes of multi-state companies by changing the way they compute Kentucky taxes.
Most of the recommendations come from the report by a Blue Ribbon Commission on Tax Reform headed by Lt. Gov. Jerry Abramson, which was issued in December 2012. That report offered 94 recommendations and would have raised about $659 million in new revenue.
Beshear acknowledged the political difficulty of addressing taxes in an election year when all 100 House seats and 19 Senate seats are on the ballot.
But he doesn’t want it to be used as a “political football” in a year Republicans are aiming to take over the House to go with their Senate majority. Consequently, Beshear said, he won’t ask either chamber to pass the plan without a majority consensus in both chambers.
If it doesn’t pass this session, the governor said he will propose it again next year, determined to see tax reform enacted before his term ends in December 2015.
He got some support from House Minority Leader Jeff Hoover, R-Jamestown, who called on House Speaker Greg Stumbo, D-Prestonsburg, and Senate President Robert Stivers, R-Manchester, to appoint a small group to negotiate a final proposal.
Hoover said while he may disagree philosophically with some of Beshear’s specifics, he commended the governor for putting out a proposal.
“There’s no excuse now not to get into the discussion,” Hoover said.
Stumbo said passing the measure this session will be “daunting” and he questioned why the bourbon industry needs a tax break.
Stivers said the plan contains “components that (Republicans) are in favor of and others we don’t particularly like.” Republicans say they aren’t interested in raising more money but want to reduce corporate and individual taxes to make Kentucky more attractive to business.
Rep. Jim Wayne, D-Louisville, who was a non-voting member of the tax commission, said he found “some good and some bad” components in Beshear’s proposal. He questioned cutting some of the corporate taxes and said the earned income tax credit is less than half what it should be. He said sales taxes on car repairs would be particularly painful for lower income groups.
House budget chairman Rick Rand, D-Bedford, will sponsor the bill and his committee will take it up next week, but he stopped short of endorsing it, calling it “a starting point.” Beshear didn’t object to the characterization, saying he is open to “any and all ideas.”
Jason Bailey of the Kentucky Center for Economic Policy also served on the tax reform commission. He also commended Beshear for making a proposal. But he said the plan raises only one-third of the money which would have come from commission recommendations, money which is needed for education and health.
The Kentucky Chamber of Commerce said the proposal “strikes a reasonable balance between competitiveness and the need to fund government.”
Ultimately, the question will be how much political appetite lawmakers have for tackling the task.
“I don’t see much will to do it,” said Rep. Tommy Turner, R-Somerset.
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