State tax proposal could bring $690M

Chances slim legislature will OK all of it

By Kevin Wheatley, Published:

Taxing more retirement income, hiking the cigarette tax to $1 per pack, capping itemized deductions and adding some services to the 6 percent sales tax are among changes proposed by Gov. Steve Beshear’s tax commission that are projected to yield some $690 million.

The commission, which has explored Kentucky’s tax system for about a year, finished a series of recommendations Thursday that could see sales tax and income tax receipts rise $207 million and $501 million, respectively, and corporate taxes shrink by more than $108 million.

Lt. Gov. Jerry Abramson, chairman of the panel, called the proposal a balance that would hopefully improve the state’s financial footing in a still-recovering economy and make Kentucky more attractive to businesses.

Chances of the proposal passing the General Assembly as written are slim, however. Abramson often asked the commission to act as a political filter while whittling down its list of 97 tax proposals, but he said some recommendations have “little to no chance” with the legislature.

“If you take the political filter off, some of these are very likely to occur and some of these are very likely not to occur,” Abramson said.

“And if you begin to make that determination, that number ($690 million) comes down significantly, but that’s the politics of the General Assembly and the governor.”

The commission debated taxing personal income at a flat 5 percent, but it ultimately decided to reduce most current tax rates.

The proposal would drop the rate for earnings above $75,001, the highest income bracket, from 6 percent to 5.8 percent. The second-highest bracket, $8,001 to $75,000, would be taxed at 5.5 percent, down from 5.8 percent.

That would lower receipts by $219 million, but $350 million would be generated by capping itemized deductions, like mortgage interest and charitable giving, at around 25 percent. Greg Harkenrider, deputy executive director for policy research in Gov. Steve Beshear’s budget office, estimated the cap at about $15,000.

Another $485 million would come from lowering the exemption level on retirement income from $41,110 to $30,000. Other income would be included in the calculation, and those earning more than $60,000 would be fully taxed.

Public retiree benefits earned before 1998 would be exempt from the tax under state law.

Taxing Social Security at the federal rate was taken off the table after being tentatively approved at a prior meeting. Some on the panel said lawmakers likely wouldn’t pass that proposal, and commissioners have also received calls against the possible tax.

The commission also recommended an earned income tax credit for those on low incomes that’s projected to cost the state $115 million in revenue.

Raising the cigarette tax to $1 per pack is expected to bring in $100 million as part of some $207 million in proposed sales tax reforms, which also include $101.5 million from a 1 percent tax on household and business utilities and $14.4 million for sales tax relief for the equine industry.

Kentucky businesses could see $108.6 million in tax relief from the proposal. Most of that savings, about $110 million, comes from allowing businesses to only factor sales into their tax liabilities rather than a combination of sales, property and payroll.

The bourbon industry would see $12.6 million in tax relief by getting income tax credits in lieu of the barrel tax, and the commission also recommended closing corporate income tax loopholes, which would bring in $10 million.

Overall, the proposed reforms are expected to promote growth in Kentucky’s business sector.

“We’re helping them grow their businesses by restructuring our corporate tax structure,” Abramson told reporters. “That should, and has in other states, create jobs, attract new investment – that’s good.”

The state road fund would be $13 million lighter under proposals to lower compensation on motor fuels taxes and offer a trade-in credit for new car purchases. Commissioners say the trade-in credit could boost new car sales.

State Rep. Jim Wayne, a Louisville Democrat who served as a non-voting member of the commission, said the recommendations would provide welcome cash for government programs and services.

“It’s still not what we need, but it’s heading the right direction,” he said.

Wayne said the state’s financially troubled pension system for retired government employees could absorb much of the proposed new revenue. A pension reform task force has recommended fully funding state contributions to the state retirement system starting in 2014, meaning an additional $300 million would be needed that year.

Abramson said the two issues are connected, but the commission wasn’t asked to solve the pension crisis.

“We didn’t make our decisions based on any looming financial cliff from the pension side of the equation,” he said. “We tried to meet the governor’s five standards: fairness, competitiveness, elasticity, simplicity and adequacy.”

The panel, appointed by Beshear, will send its recommendations to the governor by Dec. 17, Abramson said. Beshear has said he will seek consensus with legislative leaders before bringing a proposal to the General Assembly. Beshear has said he may call a special session this year to handle the issue.

Still, Abramson says he expects the tax reform discussion to start when the legislature convenes its short, 30-day session in January.

“Maybe I’ll have an opportunity to make a presentation to some committees and just get people to understand the thinking behind what this group has done for 11 months,” he said.

The Associated Press contributed to this report

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