UPDATE: House passes bill to revamp Kentucky’s tax code

The proposed legislation would extend the state sales tax to a host of services

UPDATE: (MARCH 4th, 2022)

FRANKFORT, Ky (WTVQ) (PRESS RELEASE) – Legislation that would modernize Kentucky’s tax structure and gradually eliminate the state personal income tax cleared the House on Friday. The bill, HB 8, represents the next step in the House Majority’s commitment to growing the state’s economy by making the state’s tax code more attractive for working Kentuckians and individuals considering relocating to Kentucky. The measure is sponsored by House Appropriations and Revenue Chair Jason Petrie and Vice Chair Brandon Reed.

“Five years ago, we began overhauling the state’s tax code by lowering taxes and broadening the base. As a result, we saw a major jump in jobs, economic investment, and state revenue. HB 8 builds on those accomplishments by leaving more money in the pockets of the people who earned it, and it does so without placing the services Kentuckians need at risk,” Petrie said.

HB 8 would lower the state’s 5% income tax incrementally over a period of years until it is eliminated. The first decrease would reduce the income tax rate an entire percentage point to 4% on January 1, 2023, leaving an estimated $1 billion in taxpayer pockets to be invested and spent in local communities. That cost would be covered by funding set aside in the version of the budget passed by the House earlier this session.

“We were very intentional in passing a budget that both meets our state’s needs and resists the temptation to spend every dollar. As a result, we have a once in a lifetime opportunity to make long-term, generational change,” said Reed. “HB 8 advances our tax policies from those that penalize productivity to those that create a state economy that invests in its own people.”

While the first decrease is automatic, HB 8 requires the state to meet additional revenue targets before additional rate reductions can occur. Commonly referred to as triggers, the thresholds are based primarily on state revenue levels. Lawmakers used conservative revenue forecasts based on the work of the Consensus Forecasting Group (CFG) and available sales tax data to predict future state revenues.

Petrie added that HB 8 makes no changes in the corporate income tax or the limited liability entity tax (LLET), nor does it include a rumored expansion of the sales tax to traditionally non-taxed items like groceries and medication. Instead, it focuses on eliminating the personal income tax that working Kentuckians and those with retirement income pay.

“The same people threatening that this bill will lead to budget cuts were telling us that tax modernization would mean increasing the sales tax and taxing groceries and medication. Those accusations were false and these are as well,” Petrie added. “The truth is, we must grow our economy today to fund the progress of tomorrow. We are confident that state revenue will continue to support a 4% rate over time and that we will see a greater benefit each time we lower the personal income tax rate.

To ensure further decreases are triggered, HB 8 transfers away from taxing income to discretionary, consumption based taxes that are paid by those who visit the state as well as those who live here. It broadens the tax base to include extending the sales tax or a user fee to the following services as well as others listed in the bill:

–          Non-Primary Residential Utilities (primary residences would remain exempt)

–          Taxi cabs, car rentals, or transportation services like Uber and Lyft

–          Temporary Rental Services (AirBnB, VRBO)

–          Residential and Nonresidential Security Systems

–          Bodyguard and Self-Protection Services

–          Process Servers

–          Valet and Parking Services

–          Pleasure Watercraft Docking

–          Entertainment Venues and Event Space Rentals

–          Legislative and Executive Branch Lobbying

–          Cosmetic Surgery Procedures (non-medically necessary)

–          Personal Financial Planning

–          Private Mail Services

–          Road and Travel Services

–          Executive Employee Recruitment Services

–          Unsolicited Telemarketing Services

–          Public Opinion Research

The version of HB 8 approved by the House includes a tax amnesty program, essentially a window of time that those who owe taxes can pay their bills without penalty. The amnesty program was proposed by Representative Ken Fleming and is expected to lead to the collection of more than $200 million.

“Tax amnesties have been used successfully in the past, and there is even more potential with a more effective, efficient approach,” Fleming added. “We’d ideally like to see the state use a third party administrator with experience and a proven record, but would allow the Department of Revenue to do so.”

The measure also implements a battery reclamation fee on electric and hybrid motor vehicles and a tax on the use of fee-for-service charging stations. Revenue raised through these mechanisms would be earmarked to the state road fund and general fund.

“Lowering the income tax provides multiple benefits like leaving more money in our local communities. We’re also using this proposal as a tool to grow our workforce and improve the quality of life for all Kentuckians,” Reed added. “HB 8 benefits working Kentuckians and makes the state more attractive to those who are interested in relocating to our state, who will in turn make economic investments in communities throughout the state.”

Petrie and Reed are also the primary sponsors of HB 1, the House budget proposal that includes record funding for education, a continued commitment to the state’s budget reserve trust fund, and pay increases for the Kentucky State Police, state employees, social workers, and educators. That bill passed the House on January 20 and is now in the Senate for consideration.

For more information about HB 8, visit the legislature’s website at legislature.ky.gov.

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Update from March 3, 2022:

FRANKFORT, Ky. (AP) — A key legislative panel on Thursday endorsed revamping Kentucky’s tax code, advancing a bill aimed at phasing out the personal income tax and extending the state sales tax to more services.

The House Appropriations and Revenue Committee sent the measure to the full House as lawmakers debate whether to gear tax collections more toward consumption and away from personal income.

Under the bill, the state’s 5% personal income tax rate would be lowered incrementally over a period of years with the goal of eventually eliminating the levy. The measure calls for the rate to be cut to 4%. After that, future income tax rate cuts would hinge on the state meeting revenue targets.

To broaden the tax base, the proposal would extend the sales tax to a number of services.

The measure sparked philosophical differences Thursday over the structure of the state tax code.

“When tax is based on consumption — sales tax — people can make choices about what’s important to them to spend their hard-earned money on,” he added.

Opponents contend the tax overhaul would disproportionally benefit wealthier Kentuckians and could deprive the state of revenues needed to properly finance schools and other essential services.

“I think what works better for states is if we have a graduated income tax where those who can afford to do more, do more,” said Democratic Rep. Lisa Willner.

Every percentage-point drop in the personal income tax rate would cost the state slightly more than $1 billion, based on current conditions, said GOP Rep. Jason Petrie, the committee chairman.

Under the bill, groceries and medication would remain exempt from the state sales tax.

The push to overhaul the tax code comes as the state is flush with a massive revenue surplus. Budget and taxation measures will dominate work in the final weeks of the legislative session.

The tax measure that advanced Thursday would still need to go to the Senate if it passes the House. Republicans have overwhelming majorities in both chambers.

 

Original story below from February 25, 2022:

FRANKFORT, Ky. (AP) — A key House Republican proposed gradually reducing Kentucky’s individual income tax — with the long-term goal of eliminating the levy — as part of a sweeping measure introduced Friday that would extend the state sales tax to a host of services.

The long-awaited tax overhaul measure was filed by House Appropriations and Revenue Committee Chairman Jason Petrie, who said the goal is to promote strong, sustainable growth in the state.

Under the bill, the state’s 5% personal income tax rate would be lowered incrementally over a period of years until it is eliminated, according to a news release from House GOP leadership.

The first reduction would be next Jan. 1, when the rate would drop to 4%, it said. The percentage-point drop would save Kentucky taxpayers an estimated $1 billion.

“We have been very open about our goal to let people keep more of their hard-earned money rather than collecting it for the government to determine how to spend,” Petrie said. “Population growth is a necessary component of long-term growth in Kentucky and is affected substantially by our tax structure.”

The bill would require the state to meet revenue targets before more income tax rate cuts occurred.

The sweeping measure— House Bill 8 — included no reduction in the state corporate income tax.

To broaden the tax base, the proposal would extend the sales tax to a number of services. Among those targeted would be car rentals and Uber and Lyft transportation services, rental services such as Airbnb and advertising, marketing and graphic design services.

Other targeted services included in the bill include residential and nonresidential security systems, bodyguard and self-protection services, process servers, valet and parking services, pleasure watercraft docking, entertainment venues and event space rentals, legislative and executive branch lobbying, cosmetic surgery procedures (non-medically necessary), personal financial planning, private mail services, road and travel services, executive employee recruitment services, unsolicited telemarketing services and public opinion research.

Under the bill, groceries and medication would remain exempt from the state sales tax.

Another key provision would implement a “battery reclamation fee” on electric and hybrid vehicles and a tax on the use of fee-for-service charging stations. Those revenues would flow into the state road fund and general fund.

Gov. Andy Beshear wasn’t consulted by House Republicans on the proposal, said his spokeswoman, Crystal Staley. The Democratic governor routinely touts Kentucky’s strong economic recovery from the COVID-19 pandemic, pointing to records set last year for job creation and investments.

Budget and taxation measures will dominate work in the final weeks of this year’s legislative session. The unveiling of the House tax measure sparked quick reaction.

The Kentucky Chamber of Commerce, at the forefront of the push to modernize the state’s tax code, said it was encouraged by the bill’s introduction.

“Kentucky must be competitive, and significant changes to our tax code are a crucial part of that equation,” Kentucky Chamber senior executive Kate Shanks said. “We agree driving down income taxes to put more hard-earned money back into the pockets of Kentuckians is key to making Kentucky an attractive place to live and work.”

The Kentucky Center for Economic Policy, however, said the proposed tax cuts in the House bill were “skewed heavily to the rich.” It said the few “modest revenue raisers” in the measure wouldn’t come close to offsetting lost income tax revenue. The result, it said, would be devastating for schools, health programs and other human services reliant on state funding.

When the House passed its version of the next two-year state budget last month, it backed increased education spending and a pay raise for state employees. But the amount of spending was less than Beshear had recommended, as Republicans left plenty of leeway to consider tax cuts. The Senate is reviewing the budget but hasn’t yet revealed its version. Senators also would get to put their imprint on any House-passed tax measure. The GOP has supermajorities in both chambers.

Last week, Beshear endorsed legislation to temporarily cut the state sales tax rate to help cushion Kentuckians from rising consumer prices. The bill proposes a one-year cut in the state sales tax rate from 6% to 5%. That cut, if enacted, would deliver $873 million in tax relief for Kentuckians struggling with rising prices, the governor said.

On Thursday, a GOP-led Senate panel advanced a bill that would deliver income tax rebates of up to $500 per individual and up to $1,000 per household. Sen. Chris McDaniel said it would offer some relief from surging inflation, adding it was “completely separate” from any broad tax measure.

 

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