Tax reform bill heading to governor’s desk

House Appropriations and Revenue Committee Chair Steven Rudy

FRANKFORT, Ky. — Kentucky’s small banks, nonprofits and some other entities would get tax relief under a House bill that is now on its way to the governor for his signature.

Agreement on House Bill 354—which passed by a final vote of 87-8 Wednesday night in the Kentucky House—was reached by members of the House and Senate in recent days. The legislation as amended passed the Senate by a vote of 34-3 earlier in the day.

Major provisions of the bill would eliminate the sales tax on nonprofit admission sales and allow taxation of remote sales by online retailers per last year’s U.S. Supreme Court decision in South Dakota v. Wayfair, Inc.

But it was a repeal of the state’s bank franchise tax that generated much of the floor debate on the bill, sponsored by House Appropriations and Revenue Chairman Steven Rudy, R-Paducah. That provision would allow all banks in the state to instead pay corporate income tax beginning in 2021.

Rudy said Kentucky’s small community banks have suffered under the state’s bank franchise tax, which was passed years before the federal Dodd-Frank Act requiring banks to increase their capital. Because the franchise tax is based on a bank’s capital, supporters of HB 354 say small banks have been left financially-strapped.

Rudy said out-of-state banks have taken advantage of that by buying out small banks and shipping their capital out of Kentucky.

Under the changes in HB 354, he said, “hopefully the exodus of banks in this state will stop and we will revitalize our financial institutions.”

“Our tax climate and our industry is constantly changing and it will constantly evolve and we will constantly have to be revisiting the tax code in the years to come,” he added.

Sen. Christian McDaniel, R-Taylor Mill, said HB 354 was part of an ongoing process to modernize Kentucky tax code.

“Taxes will always be something that none of us like, but services will always be something that all of us demand,” said McDaniel, who is chairman of the Senate Appropriations & Revenue Committee. “We strive to create a tax code that is fair, that is equitable, that is good for our citizens, and that attracts and retains high-quality employers who provide good jobs and pay people well to help them to succeed to the maximum of their God-given potential.”

Minority Caucus Chair Derrick Graham, D-Frankfort, voted for the bill but said he hopes the General Assembly will act on legislation that increases revenue for education and other state needs in future sessions.

“We cannot continue to compete with the other states…if our education system is breaking down because we’re not adequately funding our education system,” said Graham.

House Speaker David Osborne, R-Prospect, informed all members that there is a need to act on the bank franchise tax repeal in the current session. He said 37 Kentucky-based banks have left the state in the past five years because “they are being taxed $56 million more than any other corporate interest in the state of Kentucky.

“And if takes leadership to stand up for those people who make those jobs, then I’m here to do it, and I would hope that every single person in here would,” Osborne told the House.

HB 354 would also include a lower property tax rate for heavy equipment rentals, exclude fees paid to enter fishing tournaments from the state tax definition of admissions, address extended warranties involving small rural telecommunication companies, and exclude poultry from the sales tax on veterinary services. Additionally, it would add a tax exemption for National Guard training income, among other tax changes.

Earlier in the day the House approved pension income tax changes in House Bill 58 by a vote of 94-0. The bill, sponsored by Rep. Regina Huff, R-Williamsburg, would retroactively increase the amount of pension income excluded from state taxation from $31,110 to $41,110 to address tax changes made in 2018. HB 58 would also require the state to automatically issue refunds for tax collected below the $41,110 threshold for the 2018 tax year.

HB 58 now goes to the Senate for consideration. An emergency clause in the bill would require the tax change in HB 58 to take effect immediately should it become law.

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