Gov. Beshear: Tax Reform Plan Vital to Kentucky’s Future

Governor Steve Beshear

Modernizes tax code, reduces income tax rates, positions the state for job growth

FRANKFORT, Ky.– Governor Steve Beshear has unveiled his legislative plan to modernize Kentucky’s tax code by strengthening the state’s ability to create jobs, expand existing industry, and ensure a healthier workforce and economy.

The “Kentucky Competes” tax reform plan creates a 21st century tax code to match Kentucky’s 21st century economy, thereby creating additional revenue as the economy grows.

“Kentucky’s current tax code hampers our people and our businesses, preventing us from growing the economy we need and deserve,” Gov. Beshear said. “This plan simplifies our tax code, creates an even more attractive business climate for current and future businesses, and offers some relief to every working Kentuckian.”

The plan is based on the recommendations of the Governor’s Blue Ribbon Commission on Tax Reform, led by Lt. Governor Jerry Abramson. The Commission spent months holding town hall meetings in each of the state’s six congressional districts to gather information from all interested Kentuckians.

“If Kentucky wants to be competitive in the 21st century and offer employees an educated, productive and skilled workforce, we must enhance our ability to attract and retain jobs by modernizing our tax system,” Lt. Gov. Abramson said. “The Governor’s ‘Kentucky Competes’ tax reform plan does just that by making specific recommendations on how to update the Commonwealth’s antiquated tax system and make us more competitive at all levels.”

The 23 Commission members combined that grassroots information with analysis from respected tax consultants to create a report from which the Governor has drawn many of his plan’s proposals.

The Blue Ribbon Commission’s recommendations were based on five guiding principles:

simplicity and compliance

‘Kentucky Competes’ accomplishes those goals by implementing tax reforms that:

create a modern tax code that grows with the 21st century economy create jobs
help the state’s signature industries thrive
create a healthier, more productive workforce
acknowledge changes in the economy and technology, and align the state’s tax code with other states and
provide other needed updates.

A complete description of each proposal and its fiscal impact is in the attached ‘Kentucky Competes’ document.

Below is a brief overview of the plan:

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.

Governor Seeks Consensus Before Any Vote
The legislative proposal will be introduced by Rep. Rick Rand, the chair of the Appropriations and Revenue committee, so discussion can begin quickly. “I will ask the House budget committee to hold hearings on this proposal soon to receive input from the public,” said Gov. Beshear.

“However, I am well aware that a proposal to amend our tax code is a politically sensitive matter, especially during an election year. I am also aware of the potential of turning what needs to be a serious discussion regarding tax reform into a political football to be used by our political parties in the upcoming elections. I am determined to avoid that possibility,” he said. “Therefore, I will not ask either chamber to vote on the bill or any version thereof unless a consensus has been reached on a proposal by a majority of both Houses which will assure its passage.”

The Governor explained that this process of building consensus between both chambers has proven successful before – particularly in last session’s effort to resolve the state’s unfunded public pension liability. That bill was debated and approved during a short (30-day) session, so the Governor said there was plenty of time to reach a consensus. He added that building agreement before any vote will be “the only approach which offers any opportunity for success” in passing tax reform.


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