FRANKFORT, Ky. (Dec. 17, 2012) – The Governor’s Blue Ribbon Commission on Tax Reform, chaired by Lt. Gov. Jerry Abramson, offered a report of its findings and recommendations to Gov. Steve Beshear today.
“I appreciate the hard work and research by the Blue Ribbon Commission on Tax Reform to craft these recommendations to make our tax code fairer, simpler and more responsive to the needs of a 21st century economy,” Beshear said. “The task was not easy, and commission members clearly took the work very seriously. I will review this report and will discuss the findings with legislators as we seek ways to make sure our state has the resources it needs to meet the needs of our people.”
“As chair of Gov. Beshear’s Blue Ribbon Commission on Tax Reform, I am confident that the work by our members over the last 11 months will help to align Kentucky’s tax structure with the principles of fairness, economic competitiveness and a 21st century economy,” said Lt. Gov. Abramson. “Our report is thorough and includes suggested changes to the state tax code that would generate roughly $659 million in new revenue annually once fully implemented. These proposals will also modernize our tax structure, making it fairer for families and businesses. The changes would position Kentucky to create more jobs, further grow our economy and fund many of the services the commission heard were needed all across the Commonwealth. I look forward to working with Gov. Beshear and the leadership in the House and Senate to build a consensus on moving forward with changes to our tax code.”
The 54 proposals that the commission voted to approve are as follows:
Individual Income Tax
• Reduce the individual income tax rate structure as follows:
Adjusted Gross Income Current Rate Proposed Rate
$0-$3,000 2% 2%
$3,001-$4,000 3% 3%
$4,001-$5,000 4% 3.5%
$5,001-$8,000 5% 4.5%
$8,001-$75,000 5.8% 5.5%
$75,001 and over 6% 5.8%
• Enact an Earned Income Tax Credit (EITC) at 15 percent of the federal EITC.
• Limit itemized deductions to a $17,500 dollar cap that generates $350 million.
• Amend the pension income exclusion from $41,110 to $30,000, and phase out the exclusion for total income over $30,000.
• Change the reference to the Federal Code from December 31, 2006 to December 31, 2012.
• Implement a tax deduction for 529 savings plan contributions.
Corporate Income Taxes
• Lower the top corporate tax rate from 6.0 percent to 5.8 percent.
• Add back management fees in the calculation of the corporate income tax base.
• Change the current three-factor apportionment rule to implement single factor apportionment based solely on sales.
• Change the existing cost-of-performance based formula for apportioning sales to incorporate a destination sourcing for services.
• Amend the small-business standard from $3.0 million to $1.0 million and maintain the dollar-for-dollar phase-out for gross receipts or gross profits to $2.0 million.
• Establish an angel investor tax credit program for certain investments in small businesses.
• Expand the state’s R&D Tax Credit to human capital; cap the amount available; and require that it is approved through some governing body, such as KEDFA.
• Fully decouple from the deduction for U.S. production activities (QPAI).
Sales and Excise Taxes
• Apply sales tax and transient room taxes to entire hotel accommodation price.
• Broaden the sales tax to selected services, with the following principles:
• Household-consumption based,
• Luxury items,
• Services that have a clear nexus to Kentucky,
• Tied to physical products already taxed,
• Services that have an inelastic demand, such that the imposition of the tax would result in minimal household or business shifting to avoid the tax, and
• Be sensitive to border state sales taxes.
• Exempt mail charges for direct mail from sales tax.
• Impose a gross receipts tax of 1 percent on both residential and business utilities and dedicate additional revenues to the SEEK funding formula.
• Increase collection of out-of-state and Internet sales. Support federal legislation allowing states to require remote firms to collect sales tax.
• Increase the tax rate on cigarettes to $1 and other tobacco products commensurate to the cigarette tax.
• Repeal the distilled spirits case sales tax.
• Restore Cigarette Rolling Papers Tax.
• Exempt the sales and use tax on certain equine products to support the signature equine industry.
• Apply sales tax to pre-written computer software made available for access without a download.
• Create an income tax credit for the bourbon industry to offset the property tax on stored barrels of bourbon, without reducing local property taxes to school districts or local communities.
• Exempt inventory from state property tax (merchant’s inventory, manufactured finished goods, and goods stored in warehouse).
• Freeze the state property tax rate at 12 cents per $100 of value.
• Clarify the identification of public service companies for taxation.
• Require reporting of the rental space for documented watercraft/private airplanes.
• Eliminate selected negligible state property tax rates for tangible personal property, with an emphasis on classes of property subject to the “State Rate” only.
• Eliminate the export credit under the minerals severance tax.
• Clarify the definition of “gross value” under severance tax.
• Impose the Pari-mutuel tax on advance deposit wagers made on live races conducted at Kentucky race tracks.
• Provide for a review every five years of all tax incentives and expenditures.
Road Fund Issues
• Stabilize fuels tax revenues to support highway funding by raising the floor of the average wholesale price for fuels taxes.
• Reduce dealer’s compensation on motor fuels tax from 2.25% to 1%.
• Implement a trade-in credit for new car purchases that would equalize the treatment for used vehicles and new vehicles.
Local Taxation Issues
• Amend Section 181 of the Kentucky Constitution to allow a local general sales tax.
• Remove the HB44 recall provisions for local and school real property taxes.
Simplicity, Compliance and Tax Administration
• Allow non-renewal of professional licenses, driver’s licenses and vehicle registration if taxpayers have exhausted all appeals and still refuse to pay state taxes to improve collections.
• Amend tobacco tax laws to provide clarifications and administrative improvements enabling the Department of Revenue to better enforce Kentucky tobacco tax laws.
• Apply statute of limitations evenly to both assessments and refund claims. Extend the number of days to protest an assessment to at least 60 days, preferably 90 days.
• Clarify the definition of “pollution control facilities” under tangible personal property tax statutes.
• Define the terms “broadcast” and “telephonic equipment” in the tangible personal property tax statutes.
• Eliminate the need for paper Form K-1E, Kentucky Employer’s Return of Income Tax Withheld.
• Give multijurisdictional taxpayers a minimum of 180 days to report changes on a prior federal return at the state and local level.
• Clarify installment payment agreement provisions.
• Repeal the Rural Electric Cooperative Corporation & Rural Telephone Cooperative Corporation Tax (one tax).
• Under the tangible personal property tax statutes, clarify that inventory-in-transit must be delivered to a permanent out-of-state destination in order to qualify for the under 6 month exclusion.
• Update use tax notification and compliance requirements for remote vendors.
• Return to a balanced interest rate on taxes owed to and by the state.
• Add clarifying language in KRS 139.480(11) regarding farm machinery that specifies combine header trailers are exempt from sales tax.
• Repeal the school tax rate exclusion from sales tax calculation on “residential telecommunications service” found in KRS 139.470(9).
• Review the disparity in the tax code and law between documented and undocumented boats.