Friday, December 7, 2012

Commission on Tax Reform - FINAL MEETING SUMMARY

Staff Report by Rachel Phelps

The Governor's Blue Ribbon Commission on Tax Reform met for the final time Thursday.  As you know, the Commission has been meeting since late Spring working to make recommendations on changing the state's tax code.  At the end of the day long meeting and with all changes scored, the Commission recommended a package that increases state revenue by nearly $700 million, with over half coming in changes to the individual income tax.

The Commission staff is now putting together the actual report and plans to have a draft copy to all Commission members by December 11th. The final report will be sent to Governor Beshear on December 17th. The Governor will review the report and then make the decision on what he will submit to the General Assembly. He has said he will discuss with leadership in the General Assembly before reaching any final decision.  Governor Beshear could also end up adding to the recommendations or removing some from the package.  He did say yesterday that it would be difficult to address during a short session and that a special session on this and pension reform might be necessary.

As with any tax proposal, the actual language to accomplish the intent will be very important and none of that has been drafted to date to our knowledge.  What is listed in the "scorecard" are the recommendations and those will have to be converted to the language in a bill for the General Assembly to consider.

The scorecard is the best document to date that lists what is actually contained in the recommendations.  The only detail missing is the individual income tax.  They are recommending a progressive rate option with the top rate being reduced from 6% to 5.8% and the second highest rate from 5.8% to 5.5%.  Deductions will be capped and retirement income will be taxed for the first time beginning above 30K.  Also, please be aware that the numbers on the score card are not exact and some were changed or tweaked during the meeting yesterday.  The "Throwback" was taken off the table altogether yesterday and the cigarette tax will be roughly 100M and the OTP tax 10.4M after you take out the inventory tax (after the first year) which is included in the numbers on the sheet.

For your convenience here is a snapshot of the changes to the corporate income tax.  We do advise that you review the attached score card as well though. Additionally, take note of applying the sales tax to some services - although the Commission did not set the services that would be taxed, they only used broad categories which had been recommended by the consultants.  The detail of what exact services will be taxed, under this plan, would be included in the bill language, if and when it is introduced.

Corporate Taxes
Single Factor Apportionment - (110 million)
Destination Sourcing - (10 million)
Angel investor Tax Credit - (3 million)
Income tax credits in lieu of barrel tax - (12.6 million)
Decouple QPAI - 4 million
Lower the small business standard on the LLET - 13 million
Eliminate corporate income tax loopholes - 10 million

We will send you the final report when we receive it.  Please don't hesitate to contact us with any questions or concerns you may have.

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