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From your friends at Government Strategies

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.

2012 Election Recap

Kentucky voters went to the polls on Tuesday to elect their representatives at all levels of government. Going into election day the big headlines at the state level were all tied to whether Republicans could capitalize on President Obama's lack of popularity in Kentucky, as Romney won Kentucky with 60% of the vote: 1. Could the House GOP gain a net of 10 seats to garner control of the State House, 2. Could Congressman Chandler (D-Versailles) hold onto the 6th Congressional District from a strong challenge from Andy Barr in a re-match from 2010, and would the GOP broaden their majority in the State Senate. Certainly Republicans fared well in Kentucky, but it wasn't a complete sweep, here is a quick run down on those story lines. 

1. House GOP gains a net of 4 seats - Obviously not the 10 seats they were hoping to pick up in order to gain control of the State House. Going into tonight the state House balance of power was 59-41, after tonight's results Democrats now have a 55-45 majority with the GOP picking up 4 seats. Here are the main seats in play on Tuesday night:

- 3 Incumbents Lose: Heading into this election many were speculating on whether there would be rampant anti-incumbent sentiment. Its too early to draw any solid conclusions from Tuesday's results, but the facts are that 3 State House incumbents lost: 2 Democrats and 1 Republican. Here is a rundown:

49th - Rep. Linda Belcher was defeated by Russell Webber - GOP Pickup

38th - Rep. Mike Nemes was defeated by Denny Butler - Democrat Pickup

91st - Rep. Teddy Edmonds was defeated by Gary Herald - GOP Pickup

*As of this report in the 7th district Rep. John Arnold appears to have won by 5 votes. This will likely be subject to a recanvass and/or recount.

- 6 Open Seats:  3 Currently Held by Rs (Farmer-88th, Napier-36th, Housman-3rd) & 3 Currently Held by Ds (Nesler-2nd, Henley-5th, Cherry-4th)

Here are the results: 

88th - Benvenutti (R) beat Thomas (D) - GOP Holds

36th - Shell (R) beat Montgomery (D) - GOP Holds

3rd - Watkins (D) beats Crockett (R) - Democrat Pickup

2nd - Heath (R) defeats Whitaker (D) - GOP Pickup 

4th - Bechler (R) defeats Giannini (D) - GOP Pickup

5th - Imes (R) defeats Kemp (D) - GOP Pickup

2. Barr takes down Incumbent Chandler - In a heated rematch that was settled by less than 700 votes in 2010, the biggest surprise in Kentucky may have been the win by Andy Barr, defeating incumbent Ben Chandler for the 6th district Congressional district by a margin of roughly four percent.  This was a tough battle that saw approximately $4M spent on television advertising.  While after redistricting it was assumed Congressman Chandler would have the edge, it appears that Barr received most of his votes from the districts that were assumed to be Chandler leaning, perhaps due to the President Obama being on the ballot.  Coal was a huge issue in this race and it appears that although strongly democratic, coal issues may have swayed the race leading to a win by now Congressman Andy Barr. This article covers the race.

3. GOP Gains 1 in State Senate - Heading into Election Day the Senate GOP looked to widen its 22-15-1 majority by targeting a couple of incumbents, while the Senate Democrats looked to make gains in open seats. The end result was a GOP gain of 1. Here is a rundown on the races of interest:

- Anti-Incumbent Sentiment - We saw several incumbents lose in the State House and the anti-incumbent bug bit in the Senate as well. Sen. Joey Pendleton was beat by GOP Challenger Whitney Westerfield by 200 votes. 

- GOP Holds onto Open Seats - Three Open Seats all currently held by Rs (Westwood-23rd, Winters-1st, Jensen-21st) will remain in GOP hands after Tuesday.

23rd - Chris McDaniel (R) defeated James Noll (D)

1st - Stan Humphries (R) defeated Carroll Hubbard (D)

21st - Former Senator Albert Robinson defeated Amie Hacker (D)

A full run down of the election returns is attached as of 11:30 p.m. and 98% precincts reporting. We will have more analysis in the days ahead.

KY Spirit - Managed Care Update

There was a lot of activity on the Medicaid Managed Care front on Wednesday. Here are the highlights:

- The day started with KY Spirit, the MCO that is a subsidiary of Centene, notified the state that they would be terminating their managed care contract with the state effective July 5, 2013 via this press release. The assertion in this press release is that the state "provided erroneous information related to medical cost experience and non-standard program policies during the RFP process." Due to these errors KY Spirit has filed a formal complaint for damages from the state. The closing of their Lexington offices will cost the state 200 jobs as well.

- The initial reaction from the state was this joint press release from the Governor and CHFS Secretary Audrey Haynes. The release says two important things: 1. The state considers this a breach of contract and will enforce the contract provisions, and 2. The state will work to transition the lives managed by KY Spirit will be moved to the other existing statewide MCO's Wellcare and Coventry. So the state basically is putting KY Spirit on notice that they will be counter-suing for breach of contract.

- This afternoon at the Interim Joint Health & Welfare Committee, members were treated to an impromptu briefing from Secretary Haynes in regards to the KY Spirit situation. Secretary Haynes gave a very detailed account of the situation and came across as very transparent to the committee. Here are the highlights:

1. This dispute is about money. Secretary Haynes had been in discussions with KY Spirit over the past two weeks over a change in their capitation rate. The facts are that their initial rate was roughly $70 on average per member per month less than the other two MCO's in year 1. Further, KY Spirit had only asked for a 1% increase for year two when the contract was signed, when the other two MCO's have contractual increases of 3-5% respectively. This has widened the gap in capitation payments between KY Spirit and the other two MCO's to nearly $90-100 pm/pm. So in essence, KY Spirit bid too low though Secretary Haynes acknowledged that their losses were real and that they were struggling to make money.

2. Secretary Haynes confirmed what the press release from the Cabinet hints at, the state will try and recover damages from KY Spirit for breach of contract. She mentioned that it would trigger the contract provisions requiring loss of KY Spirit's performance bond and a 10% provision for liquidated damages. Secretary Haynes went as far to say that any extra funds this costs the state, the state will try to recoup from KY Spirit.

3. Secretary Haynes took the gloves off a little in her remarks on two occasions: 1. Pointing out that the increase in Centene's stock price in one day was enough to cover the costs they were losing in the state. 2. She also said that Centene was announcing earnings soon and that they may "take their foot off the gas" once that passes.

Legislators on the Health & Welfare Committee had several concerns from the loss of jobs to the transitioning of patients and continuity of care. However, the biggest concern was expressed over the potential cost this could mean to the state. As KY Spirit's lives are moved to one of the other two MCO's the state will incur costs for those lives at a higher capitation rate, as stated above almost $100 per member per month more. Based on some quick math in the committee members calculated the potential cost at $168 million. Secretary Haynes said that it was early in the process, but the state's intent is that any extra costs to the state will be paid by Centene.

One thing is for sure, more litigation is likely to follow.

September Receipts - General Fund Up, Road Fund Down

The Budget Director released the September Tax Receipts today, and you can download a copy of her release and attachments HERE. The highlights are:

- General Fund receipts were up 5.3% in September 2012 over September 2011. This brings 1st quarter revenues up 2.1%. The official revenue estimate, which the budget is based on, calls for 2.4% revenue growth for this fiscal year, so revenues need to grow at least 2.5% for the remaining 3 quarters to achieve that growth.

- Road Fund revenues on the other hand were down in September 2012, 3.9% less than September 2011. This is new territory for the Road Fund revenues, which have posted their second consecutive monthly decline after 25 months of increasing revenues. To meet the forecasted estimate for this fiscal year of a 3.9% increase, revenues need to increase 4.7% the remainder of the fiscal year.