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Public Policy: Big Budget Plus Tax Reform

2022 legislative session brings generational investment, pay raises.

By Bob and Julie Babbage

The 2022 legislative session was one for the Kentucky history books. Record-level revenues made for a far more pleasant budgeting process, with significant investments and policy reforms expected to produce returns for generations.
Here are some of the highlights:

House and Senate budget negotiators reached a deal on the $13 billion two-year spending plan that includes state worker raises, full funding for the state’s pension systems as well as all-day kindergarten and money to spruce up state parks.

The budget allots some of the state’s historic surplus to bring the state’s “rainy day” fund total to an all-time high $1.75 billion.

Gov. Andy Beshear and members of the Democratic minority cheered investments in shared priorities but expressed regret on missed opportunities in areas such as direct funding for teacher raises and pre-kindergarten.

GOP lawmakers pointed to the $537 million in new funding going straight to school districts, some of which can be used toward those initiatives.

House and Senate leaders stressed that school superintendents requested money directly so they could make decisions at the local level, with many districts already pledging employee raises. A 1% statewide teacher salary increase costs $47 million.

Tax Reform
Tax reform was perhaps the most significant topic of this year’s session. Originally, the House proposed to phase out the income tax entirely, while the Senate pushed for $500 rebates to individual filers, and the governor advocated for a 1% reduction in sales tax.

GOP budget leaders brokered a compromise, producing a final version of House Bill 8 that establishes a formulaic trigger for any tax rate decreases.

Under the new law, state income tax will drop half a percentage point if two conditions are met. First, the state’s general fund revenues for that year must exceed expenses plus the value of a 1% drop in the income tax rate. Second, the state’s rainy day fund must equal at least 10% of certain general fund receipts at the end of a fiscal year.

Provided both conditions are met for FY 2021, Kentucky’s flat individual income tax rate of 5% will be reduced to 4.5% starting Jan. 1, 2023. The half-point decrease is triggered again if the same is true in FY 2022, moving to 4%, as long as the General Assembly reapproves the plan.
The fiscal note for HB 8 projects a decrease in tax revenue of nearly $1.1 billion in the next two years. To help account for some of those losses, lawmakers left more than $1 billion unspent in the budget.

Legislators also moved to eliminate sales tax exemptions for a wide range of industries and related services, hoping to boost the general fund revenue pool.

HB 8 expands 6% sales tax to the following areas: personal fitness, cosmetic surgery, athletic instruction, massage, parking, rideshare services, auto clubs, household moving, boat launching, short-term housing rentals, and event rentals. Sales tax will be added also to financial services, travel agency services, social event planning, marketing, telemarketing, lobbying, and website-related services.

Owners of electric vehicles can also expect to see new fees. Roads have long been funded from the gasoline tax collected with every fill-up. Obviously, the electric car and truck drivers bypass this payment. Many states are now taking steps to capture participation by growing electric vehicle usage.

Unemployment Insurance and Public Assistance Reforms
Leaders have consistently stressed the need for individuals to return to work as Kentucky continues to have one of the lowest workforce participation rates in the country.

House Bill 4 establishes a new timeline of unemployment insurance (UI) benefits that ranges from 12 to 24 weeks, based upon the state’s average unemployment rate at the time of the individual’s application.

Additionally, UI recipients must now show evidence of five job application attempts per week, up from once per week under the current law.
The legislature passed House Bill 708 in an effort to tackle uncertainty and financial implications of returning to work. The bill tasks the Cabinet for Health and Family Services with developing a “benefits cliff” calculator for Kentuckians applying or reapplying for public assistance benefits.

A benefit cliff is when an individual suddenly loses eligibility for a public assistance benefit because of a new job or wage increase. HB 708 creates a legislative task force to analyze the issue and make recommendations for recipients transitioning to work and new career opportunities.

House Bill 144 helps business owners freeze their UI employer contribution tax rate at 2020 levels. Business community outcries prompted the move as employers are partially responsible for topping up the Unemployment Insurance Trust Fund when benefits deplete it.

Health Care Worker Shortages, Recruitment, and Retention
Health leaders took major steps to address provider shortages, recruitment and retention challenges prevalent even before the pandemic.
Senate Bill 10 aims to curtail massive nursing shortages. It restructures the state nursing board, relaxes current limits on nursing school enrollments, expands qualifications for instructors, and expedites licensure for nurses from other states.

House Bill 573 targets health provider recruitment and retention by creating the Healthcare Worker Loan Relief Program. House and Senate budget leaders set aside $2 million in each fiscal year for a loan repayment program.

Signature Industry Legislation
Last year’s bill codifying historical horse racing machines into law passed on the promise of reform to the parimutuel tax structure. This year’s House Bill 607 equalizes tax rates on all wagers and eliminates the use of breakage on payouts beginning Aug. 1.

HB 607 sets a 1.5% tax rate on parimutuel bets, in-person and online. That’s a decrease in several percentage points for bets made at tracks in Kentucky and across America. For wagers made via app, the tax is increased a full percentage point. This online betting, known as advance deposit wagering (ADW), is the fastest-growing revenue stream in the parimutuel tax pool.

Bill champions noted the goal of HB 607 is to make Kentucky the most desirable state for horse wagering in the country. The new rates are expected to expand the industry and opportunities across the board.

Bourbon had major wins with House Bill 500 and Senate Bill 160. Both bills sought to protect and regulate the private barrel selection process, a burgeoning market.

House Bill 500 permits distillers to sell barrel-select bottles of product directly to customers in their gift shops. It allows distillers to have one satellite gift shop as an extension of their retail license, making it easier to sell and sample brands at fairs and festivals.

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