April 2, 2018

STATE TAX RAISE!

Cigarette tax hike, other new taxes unveiled as part of Kentucky Republicans’ budget plan

No new revenue producing ideas mentioned

FRANKFORT, Ky. — A bill that establishes a flat income tax rate of 5 percent, applies the sales tax to 17 services, and increases the cigarette tax by 50 cents per pack was approved by a legislative conference committee Monday morning.

The bill is the first significant overhaul of the state tax code since 2005 and is now headed to the Senate and House floors where it will likely be passed into law later Monday.

Senate President Robert Stivers, speaking briefly with reporters, acknowledged some may view the Senate revenue proposal as a tax increase.

“You can couch it however you want to,” said Stivers, a Manchester Republican. “It does generate positive revenue.”

Secretary of State Alison Lundergan Grimes released a statement in response to House Bill 366, the tax measure just passed by the Kentucky General Assembly:

“…Today, the GOP-majority General Assembly voted to balance the state budget on the backs of hardworking Kentuckians.

“If nine hours was enough to pass a sewage pension bill, it is enough time to pass medical marijuana and gaming – measures that actually increase revenue, not shift the tax burden from the wealthiest to the working people and small business.

“Republicans will call this plan “tax reform” but, in reality, it is a tax break to the people who bankroll their campaigns….”

The surprise tax bill — a combination of tax increases and tax cuts — would generate $239 million in additional state revenue in 2019 and $248 million more in 2020.

The additional revenue is crucial to supporting the state budget bill that was also approved by the conference committee controlled by majority Republican leaders of the House and Senate.

The budget bill, and last week’s surprise pension reform bill, brought thousands of teachers to the Capitol on Monday, and a crowd of teachers watched the budget announcements from an overflow room. 

A report that Family Resource Centers would be fully funded under the budget bill brought cheers and whoops from the teachers. And Rep. Steven Rudy, R-Paducah, said the proposal does not include money for charter schools.

The budget bill also restores the public school funding for student transportation and local district health insurance that would have been cut in the budget proposed in January by Gov. Matt Bevin.

The bill also provides $4,000 per pupil per year in base school funding. That is more than the $3,984 per pupil proposed by Bevin and the Senate, but less than the $4,055 per pupil that was included in the House’s version of the budget bill.

“I personally think this is a very strong budget … a very strong commitment to public education,” Stivers said.

The budget proposal also included controversial language allowing universities to fire tenured faculty when making financial cuts.

It was not until late last week, after a pension bill was rammed through the House and Senate, that it became clear that a significant tax reform bill would also be part of deal that would generate a bit of new money that avoids the deep education budget cuts proposed by Bevin in January.

The big revenue generator within the new tax bill is the sales to certain services. The services to be taxed include the cost of labor and services for repairs and installations such as car repairs and heating and air conditioning system installations.

Other services to be taxed include dry cleaning, golf courses and country club dues, janitorial services, pet care and grooming, linen services, bowling centers, limousine services, fitness centers, landscaping, industrial laundry services, fitness and weight loss centers, overnight trailer campgrounds and extended warranties.

Both the state personal income tax (now with rates between 2 percent and 6 percent) and the corporation income tax rate (now with rates of 4 percent, 5 percent and 6 percent) will be set at a flat rate of 5 percent.

Another provision that will give many Kentucky-based corporations a huge tax cut will based the corporation income tax on only sales in Kentucky. Current law bases the tax on sales, property and payroll in Kentucky.

This provision has been advocated for years by the Kentucky Commerce and amounts to a big cut for companies that have lots of property and employees in the state but sell most of their goods out of state.

Kentucky’s current exclusion for the first $41,110 in pension income from the state income tax will be lowered to $31,110. This was one of the main recommendations of a tax reform commission under former Gov. Steve Beshear.

And many deductions on the state income tax will be disallowed, including deductions for taxes paid, medical expenses, casualty and theft losses and interest expense on investments.

The increase in the cigarette tax, from 60 cents per pack to $1.10 per pack, would generate about $132 million more in revenue in 2019, and decline to $112 million in 2020. 

Health advocates who had lobbied for a cigarette tax of at least $1 a pack were disappointed.

“A 50-cent cigarette tax increase is a missed opportunity,” said Tonya Chang, with the American Heart Association. “It will do nothing to reduce youth smoking or help adult smokers quit.”

A $1 a pack increase would bring in an additional $266 million a year in revenue, according to health advocates, and would significantly cut Kentucky’s rate of adult smoking, the highest in the nation, as well as its high rates of smoking-related death and disease.

Chang said the lower increase proposed by the Senate won’t affect Kentucky’s high rates of smoking related death and disease.

Stivers said the Senate Republicans settled on the sales taxes on some services and other changes as “the most fair and the most equitable” as well as those most likely to bring revenue growth.

Democratic Senate Leader Ray Jones of Pikeville objected over minority members being excluded from the budget discussions. Jones said the budget was crafted behind closed doors with “a legion of lobbyists.”

Stivers said he hopes the Senate can pass the budget and revenue bills by the end of the day Monday.

Asked if he has the votes in the Senate, Stivers said “I believe I do.” Asked if Gov. Matt Bevin is on board with the bills, Stivers replied “I do not know.”

By Tom Loftus and Deborah Yetter
Louisville Courier Journal