FRANKFORT — A Blue Ribbon Tax Commission appointed by Gov. Steve Beshear is recommending raising about $690 million in new revenue by lowering corporate and individual tax rates while limiting some deductions, raising tobacco taxes and extending the sales tax to some services.
The proposals face an uncertain reception in the General Assembly which has been reluctant to take on tax reform because of fears lawmakers will be accused of raising some taxes.
Even Lt. Gov. Jerry Abramson, who chaired the commission, concedes some of the proposals aren’t likely to pass legislative muster.
“I think there are some items on here that have little or no chance,” Abramson said after Thursday’s meeting. “But that’s the politics of the General Assembly and the governor.”
Even if the full package were to clear the legislative hurdle, the full amount might not be available for expanded services because the legislature will also receive recommendations from a pension tax reform task force to begin annually appropriating more than $300 million to shore up those funds.
“There’s connectivity between those two issues – there’s no doubt about that,” Abramson said. “But we didn’t make our decisions based on any looming financial cliff from the pension side of the equation. We tried to meet the governor’s five standards: fairness, competitiveness, elasticity, simplicity; and adequacy.”
That last standard might be hard to achieve as well. Abramson said the state budget has been cut $1.6 billion in the last five years, more than double the full amount achieved by the recommendations.
Changes to motor fuel and motor use taxes will reduce revenues to the road fund by $13 million.
Rep. Jim Wayne, D-Louisville, a non-voting member of the commission, said the additional amount for the state general fund “is not enough but it’s headed in the right direction.”
Wayne and another non-voting member of the commission, retiring Rep. Bill Farmer, R-Lexington, have been leading voices in the General Assembly for tax reform, though Wayne prefers a more progressive system to generate more funding for education and health and welfare programs while Farmer’s concerns have been aimed more at business competitiveness.
Wayne noted the changes to the corporate tax code, if enacted, would reduce business taxes by about $102 million or about one-fourth of what the state now collects in corporate taxes. He said those changes make Kentucky “clearly competitive” with surrounding states.
Wayne said the changes will “help the poor slightly” while asking the middle class and wealthy to pay a bit more. But, he said, it’s still not as fair a system as he’d like, one which would require a larger percentage of taxes from those with the most ability to pay and produce more state revenue.
Recommended changes are to lower the top corporate and individual tax rate from 6 percent to 5.8 percent; cap deductions at about $20,000; and tax retirement benefits and income over $30,000 at a one-to-one rate – the deduction would be lowered $1 for every $1 over $30,000 of total income.
All those changes are calculated to bring in approximately $501 million more in state revenues.
State property tax rates would be frozen at 12 cents per $100 of assessed value. Cigarette taxes would rise to $1 per pack and other tobacco products would be taxed at 22.5 percent. A 1 percent state tax would be assessed on utilities. The six percent sales tax would be extended to some unspecified services.
The commission is also recommending a constitutional amendment to allow cities to enact a local, 1 percent sales tax.
Those and other changes add up to about $190 million and with the $501 million in income tax revenues produce the $690 million.
Beshear on Wednesday acknowledged tax reform “will be tough in this political climate” and said he wasn’t sure it could be passed in the 2013 General Assembly which convenes in January.
The 2013 session is a “short” session in a non-budget year and any tax measures passed in those odd year sessions must get a super majority of 60 percent to pass.
The governor has said he will sit down with legislative leaders once he gets the commission’s recommendations and see which items have enough support to pass. Even if there is agreement, he said, tax reform might require a special session.
Abramson said he and his staff will prepare a draft report of the recommendations for review by commission members by Tuesday and provide two days for commissioners to comment. A final report will then be delivered to Beshear on Dec. 17. (The original deadline of Dec. 15 falls on a Saturday.)
Abramson said the commission began its work – nearly a year ago – without a goal of raising a specific amount of new revenue. He conceded the recommended amount will replace less than half of the $1.6 billion cut out of the budget over the past five years.
Instead, he said, the changes would create a code which can respond to changes in the economy over time.