Thursday, November 8, 2012

Tax Reform Commission Update


Tax Reform Commission Meeting

The Governor's Blue Ribbon Tax Commission met today and continued its work of culling the 95 recommended changes in the tax code, that have been proposed by comments at public meetings, individual Commission members, the Department of Revenue, and consultants hired by the Commission.  Here is a list of these 95 recommendations/proposals.

The bulk of the Commission's work today centered around the individual income tax and corporate taxes. There was a brief discussion regarding sales tax on services at the end of the meeting. 

Individual Income Tax

Greg Harkenrider gave a presentation on Income Tax Options to the Commission. A copy of his presentation along with a white paper on retirement income is attached. This included a long discussion on income tax deductions, calculations, and rates. The presentation was brought to try to inform members about how removing deductions and modifying retirement income calculations may impact the decisions the Commission may make on the various options.

The presentation gave the Commission 5 options/scenarios on income tax, which are presented in the attached slides. After much debate, they opted to work off of Option 2, which was originally scored at an increase of $310 million. However, they did not accept Option 2 as proposed, but with these changes:

1. Refundable Earned Income Tax Credit – 15% of Federal EITC has a net decrease on revenue of $105 million as originally scored in Option 2.
2. Retirement Income – Include Federal Taxed Social Security & Reduce Retirement Income Threshold from $41,110 to $15,000. Broadens the base significantly, Harkenrider thought maybe $200 million but it would need to be scored.
3. Itemized Deductions – Disallow 75% of Federal Itemized Deductions. Broadens the base significantly, originally scored in Option 2 at an increase of $595 million, though Greg thought it maybe less.
4. Income Tax Rates – Flat tax or tweak bracketed/graduated approach we have currently. No consensus on this issue, which to a certain extent drives the other three recommendations above because the rates will drive the potential revenue. Group opted to have Harkenrider score some options on a flat tax and some possible rates and tweaking the current tax brackets and rates. They will review those options at the next meeting.

Corporate Income Tax

No presentation on these. The group just worked through the list voting to approve or remove items from consideration as they went.

#20 – Replace corporate income tax with gross receipts taken off the table
#17 – Single Sales Factor & #23 Destination Sourcing – Both Approved 
#74 – Single Sales Factor as option for Local Government on Occupational Tax - Approved (This was actually listed in the local taxation recommendations)
#12 – Management Fees rolled back into the base – Approved
#21 – Combined Reporting – Voted down
#13 – Secondary Market for Tax Credits – Voted down
#14 – R&D Tax Credit – Broaden from construction to human capital and research – Greg to review and bring back at next meeting
#16 – Eliminate Capital Gains on early stage companies – Voted Down
#18 – Lower LLET Threshold - Approved
#19 – Angel Investor Tax Credit – Approved
#22 – Tax incentives for Coal Industry – Removed from consideration
#24 – Domestic Production, Decouple with Federal Tax break Feds 9% KY is 6% - Approved
#25 – Throwback Rule – Approved
#26 – Removed from Consideration
#27 – Repeal of LLET on businesses with Net Losses – Voted Down
#28 – LLET Business to Business Exemption – Voted down

Sales Tax

After five and a half hours of work on the first two topics, Lt. Governor Abramson wanted to push on into the sales tax. Instead of delving into the various recommendations he opted to start with recommendation #31 – Broadening the Sales Tax. He was trying to lead the group into a two step process – First step is to decide to broaden sales tax to services or not? Secondly was to approve broad concepts of services the commission would agree to rather than picking and choosing individual services, this would give the Governor and the General Assembly the flexibility needed to make a deal.

After some discussion, the Commission approved to expand the sales tax to services. 

Unfortunately, step two was not as simple as it seemed. The Commission generally agreed with the Lt. Governor's goal but setting the parameters were more difficult than they expected. Here are a few of the concepts discussed:

- Services taxed In 10 or more states
- Services primarily used by high income users
- Services that were for Household Consumption, so not business to business

After a wide ranging discussion the meeting ended abruptly with no consensus on, which services to tax or other recommendations on the sales tax. 

The next meeting was supposed to be on November 16, but that was problematic for several Commission members and they are now looking at November 19, though no confirmation has been given.


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