Governor Steve Beshear has proposed “Kentucky Competes” tax reform plan (PDF). The plan offers many suggestions recommended by the Governor’s Blue Ribbon Tax Commission, but thankfully omits the ones of greatest concern to the business community.
Overall the plan has many elements favorable to businesses that operate and invest in Kentucky. It includes both individual and corporate income tax reductions, favorable tax treatment of Kentucky-based companies and industries, a shift toward consumption taxes (PDF), a higher cigarette tax and reduced exemptions for high-income retirees. The governor offered this as a starting point, but will not push to force a vote unless a broad agreement can be found.
In a statement, Chamber President Dave Adkisson commended the governor for a providing a strong starting point and his emphasis on competitiveness. The Chamber will keep members involved and informed and is committed to be a constructive part of the dialogue as taxes are discussed.
Details from the Governor’s Press Release (2/4/14):
Creates a Tax Code that Competes for Quality Jobs:
• Reduces individual income tax rates. When coupled with existing Family Sized Tax Credit, the proposed Earned Income Tax Credit, and the new Hold Harmless credit, every working Kentuckian will benefit from this rate change proposal.
• Enacts a Refundable Earned Income Tax Credit (EITC) at 7.5 percent of the federal credit. This tax credit is targeted to low-wage earners, and research shows the EITC will be reinvested in local communities, which stimulates the economy.
• Lowers the top corporation income tax rate from 6 percent to 5.9 percent
• Phases in ‘single factor apportionment’ solely on sales for corporation income tax
• Creates an angel investor tax credit
• Expands the state’s Research and Development tax credit to human capital
• Doubles the New Markets Tax Credit
• Exempts inventory from state property tax
• Eliminates selected negligible state property tax rates for tangible personal property
Helps Kentucky’s Signature Industries Thrive and Expand
• Creates an income tax credit for the bourbon industry
• Exempts sales and use tax on certain equine products, similar to other livestock
• Exempts sales tax on pharmaceuticals for food animals
• Lowers wholesale tax on beer, wine and distilled spirits
• Repeals the distilled spirits case sales tax
Creates a Healthier Kentucky Workforce to Attract Jobs
• Increases tax on cigarettes to $1
• Increases tax rate on other tobacco products commensurate with cigarette rate increase
• Creates tax on e-cigarettes at 20 percent of value
• Restores cigarette rolling papers tax
Modernizes Code to Acknowledge Changes in the Economy and Technology
• Broadens the sales tax to include selected services. Kentucky long ago moved from a goods-based economy to a services-based economy, but the tax code has not adapted to this transition. This proposal expands the sales tax to the labor associated with installation and repair of taxable goods, certain recreational activities, and certain commercial, residential and personal services. Additional information is attached.
• Clarifies that the sales tax is applicable to all prewritten software, regardless of delivery method. This addresses new challenges for the sales tax created by sales on the digital cloud.
• Applies sales tax and transient room taxes to the entire hotel accommodation price. This modernization proposal clarifies that all amounts paid for staying in a Kentucky hotel or similar accommodation, including amounts charged or retained by online travel companies, are included in the tax base for the sales tax and state and local transient room taxes.
Modernizes Code to Acknowledge Changing Demographics, Differences with Other States
• Reduces retirement income exclusion for taxpayers with a federal AGI of more than $80,000; phases it out for AGI over $100,000. This proposal still keeps Kentucky’s tax code among the friendliest for retirees. Social Security benefits are currently not taxable in Kentucky and would not become taxable under this proposal.
• Phases out $10 Individual Income Tax Credit
• Requires same income tax filing status for married couples at state level as federal level
The Governor also reiterated his support for a Constitutional amendment that would allow local communities to vote on a local sales tax for specific projects they may need. That issue will be addressed in separate legislation, but the Governor said it is critical to communities’ success.
A complete fiscal impact of the governor’s proposal can be found here (PDF):