A sales tax on groceries and back-to-school sales tax holidays won’t be part of the Governor’s Blue Ribbon Commission on Tax Reform’s recommended changes to Kentucky’s tax structure.
The panel, chaired by Lt. Gov. Jerry Abramson, met for about four and a half hours Tuesday, beginning the lengthy task of debating and whittling down more than 90 tax proposals compiled over the course of 10 public meetings since March. The ideas cover a number of categories, from individual taxes to local government options.
“We have been to a lot of parts, all parts of the commonwealth, and we’ve done a lot of listening,” Abramson said.
The commission’s recommendations to make the state tax base fair, adequate, competitive and elastic are due Nov. 15, but much work remains with only one more meeting scheduled Nov. 8. Abramson said that meeting may be scheduled for six hours, and he didn’t rule out calling another before the deadline.
The group – comprised of 23 members, including six non-voting legislators – cut some proposals from consideration while also setting others as so-called “no brainers” that will definitely be included in the final report to Gov. Steve Beshear and legislative leaders.
Some proposals that will remain include repealing the distilled spirits tax and a number of housekeeping steps to clean up some tax regulations, like eliminating negligible property tax rates on personal property and clarifying some definitions in the tax code.
Some proposals that didn’t make the cut aside from the grocery sales tax and back-to-school tax holiday include exemptions on business purchases on utilities, tax credits for families that homeschool children and raising the coal severance tax.
About 70 proposals remain to be vetted, such as broadening the sales tax base to include select services, raising the 6 percent sales tax, eliminating Tax Increment Financing programs, cutting capital gains taxes for early-stage companies with headquarters in Kentucky, raising taxes on cigarettes and tobacco products, and lowering state income taxes. The commission discussed individual and corporate income tax issues at length Tuesday. Income and sales taxes account for 60-70 percent of state revenues, Abramson said.
John Williams, founder of Computer Services Inc. in Paducah, suggested a flat income tax rate with a “sizable” standard tax deduction, an earned income tax credit for low-income earners and possibly taxing retirement income, though he disagreed with taxing Social Security income.
“If you look at all the other states, Social Security is an exempt item,” he said. “What’s not across the board in other states is how much other (retirement) income would be credited on your return.”
Jason Bailey, director of the Berea-based Kentucky Center for Economic Policy, said the commission should consider “the income tax and a combination of things around the income tax that potentially do raise some revenue.”
“If we’re going to be raising revenue in a way that’s fair, the income tax needs to be on the table,” Bailey said.
Commissioners also looked at limiting some tax deductions and taxing retirement and pension incomes. Pat Mulloy, CEO of Elmcroft Senior Living in Louisville, said the state should reconsider its practice of exempting more than $41,100 in retirement income.
Consultants for the commission proposed a dollar-for-dollar tax system for pensions, and they found if the state taxed all retirement and Social Security income, revenue would increase about $425 million.
“The pyramid’s upside down in this state, and frankly most of the wealth is with the elderly citizens of our state,” Mulloy said, noting he also supported a flat tax rate. “It’s not with young people who try to teach school and do all the other stuff. Those are the folks who need tax breaks.”
The commission also discussed some corporate tax proposals, such as single-factor apportionment and destination sourcing for services. Those proposals would help Kentucky’s long-term economic development, Williams said.
While those ideas appear to foster growth in the state, Rep. Jim Wayne, D-Louisville, wondered if companies would be able to offset the loss of $65 million in tax revenues.
“If we’re going to pay $65 million for more jobs, are we going to get more than that back?” Wayne asked. “That’s the question I think we need to answer.”
The tax commission is set to consider proposals on sales, property, local and other tax issues before its recommendations are due Nov. 15. Reports and other materials compiled by the commission and its consultants can be found at http://ltgovernor.ky.gov/taxreform/pages/default.aspx.