Kentucky Political News Headlines

Sunday, January 31, 2010

Tax Reform

The Governor’s budget, with its reliance on gaming revenue was dead on arrival with both the House and the Senate.  For the first time both chambers will be working simultaneously to develop a budget.  The Governor’s budget included 780 million in gaming revenue and with the new dollars he still cut state agencies with the exception of elementary and secondary education 2% and granted teachers and state employees a 1% pay raise only if additional federal stimulus dollars come from Washington.

We think this creates an environment where the legislature will seriously begin to consider tax reform or tax modernization.  Begin to consider is the operative phrase here.  With the November elections and most incumbents drawing opposition, anything having to do with taxes would be difficult if not impossible to consider or pass.  The House will present a bill for consideration and we believe the result could be the development of a structure to begin to review and consider the state’s tax system for either a special session after the November elections or sometime next year. 

The leadership in both the House and the Senate has said they would be willing to look at tax reform as a way to generate more growth in revenue.  Both have said they would like the state tax system to become more consumption based.  Speaker Stumbo has asked a working group of legislators to draft a bill that would repeal the corporate income tax, repeal exemptions to the sales tax, apply the sales tax to services and create an earned income tax credit for the working poor.  In looking at the sales tax exemptions, he has asked them to consider those exemptions that do not impact working families.  On all other exemptions, many of which will impact businesses, the Speaker says they will start from scratch and expect those groups that benefit to come before the General Assembly and justify the exemptions.

Here is some general information on the sales tax exemptions and how they relate to business.  The sales tax is currently 6% and there are 57 exemptions not counting services.  The 57 total about 2.5 billion annually, but six of the 57 make up 1.8 billion and those six would be the hardest to repeal—food, education charity and religious institutions, labor or services used in property , residential utilities, prescription medicine and cities and counties.  The full list of exemptions is included as an attachment.

The largest category of the sales tax that would impact our business and customers would be a new tax on services. The total if all services were taxed is 1.7 billion, but 584 million is estimated for health care which you would expect to be excluded from the list.  Some of those services that would be most associated with businesses are listed below and would total 578 million.  The complete list of what the state considers as services is also attached.

·         Business services (specialized design, computer systems design and R&D ) total 250 million;
·         Advertising—36 million,
·         Professional services—109 million
·         Engineering, accounting, research and management—183 million

We think you need to have your folks begin to think about the impact of losing some of the exemptions and of having the sales tax applied to various services.  Obviously it will impact everyone differently.