Tax reform bill introduced and approved by Kentucky legislature in mere hours

FRANKFORT, Ky. — An eleventh-hour bill that establishes a flat state income tax rate of 5 percent, applies the sales tax to 17 services, and increases the cigarette tax by 50 cents per pack was unveiled Monday morning and later approved by the narrowest of margins by the House and Senate.

The bill, which represents the first significant change to the Kentucky tax code since 2005, was passed exclusively on votes of Republicans: 20-18 in the Senate and 51-44 in the House.

As a tax bill, it required a majority of all members in the 100-member House and 38-member Senate to pass. It got those votes with none to spare.

Republicans said the mix of tax cuts and increases in the bill would make Kentucky more competitive with surrounding states and generate $239 million in additional state revenue in 2019 and $248 million more in 2020 — dollars crucial to adequately funding public schools in the 2018-20 state budget.

"The time is now to act. The time is now to put the state in the right direction," said House Republican Leader Jonathan Shell, of Lancaster.

But Democrats complained about having no input and only a few hours to study the bill before voting. While more revenue is needed, they argued that the bill shifts the tax burden from the wealthy and corporations and to low- and middle-income Kentuckians.

Rep. Angie Hatton, D-Whitesburg, said the bill is "Creme brulee for the rich and crumbs for the poor."

Gov. Matt Bevin does not like it either, saying in a statement the tax and budget bills passed Monday do not meet "basic standards of fiscal responsibility." But Bevin's statement did not say whether he plans to veto the bill.

Passage of the surprise tax bill — unveiled by a conference committee controlled by legislative leaders only Monday morning - allowed lawmakers to later Monday pass the 2018-20 state budget bill by somewhat wider margins.

The budget and tax bill votes, and last week's surprise pension reform bill, brought thousands of teachers to the Capitol on Monday. They made their reactions clear as they crowded a committee room and the galleries of the House and Senate as the bills zipped through the legislative process.

More: Live updates: Teachers rally against the pension bill Monday in Frankfort

A report that Family Resource Centers would be fully funded under the budget bill brought cheers and whoops from the teachers. And Rep. Steven Rudy, R-Paducah, said the proposal did not include money for charter schools.

New revenue from the tax bill allowed the legislature to restore the public school funding for student transportation and local district health insurance in the budget - money that would have been cut in the budget proposed in January by Bevin.

The bill also provides $4,000 per pupil per year in base school funding. That is more than the $3,984 per pupil proposed by Bevin and the Senate, but less than the $4,055 per pupil that was included in the House's version of the budget bill.

But the final bill still cuts base funding for state universities by 6.25 percent as proposed by Bevin.

"I personally think this is a very strong budget ... a very strong commitment to public education," said Senate President Robert Stivers, R-Manchester.

The budget proposal also included controversial language allowing universities to fire tenured faculty when making financial cuts.

It was not until late last week, after a pension bill was rammed through the House and Senate, that it became clear that a tax reform bill would also be part of a deal that would generate a bit of new money to avoid the deep education cuts.

The big revenue generator within the new tax bill is the sales tax on certain services. The services to be taxed include the cost of labor and services for repairs and installations associated with the sale of property. For instance, currently the 6 percent sales tax only applies to parts purchased for a car repair. Under the new tax bill, the cost of labor for installing those parts would also be taxed.

Other services to be taxed include dry cleaning, golf courses and country club dues, janitorial services, pet care and grooming, linen services, bowling centers, limousine services, fitness centers, landscaping, industrial laundry services, fitness and weight loss centers, overnight trailer campgrounds and extended warranties.

Related: Here's how your income and sales taxes will change under the new plan

Both the state personal income tax (now with rates between 2 percent and 6 percent) and the corporation income tax rate (now with rates of 4 percent, 5 percent and 6 percent) will be set at a flat rate of 5 percent.

Another provision that will give many Kentucky-based corporations a huge tax cut will base the corporation income tax on only sales in Kentucky. Current law bases the tax on sales, property and payroll in the state.

This provision amounts to a big cut for companies that have lots of property and employees in the state but sell most of their goods out of state.

Kentucky's current exclusion for the first $41,110 in pension income from the state income tax will be lowered to $31,110.

More: Here's a map of all the schools closed Monday for protest over pension bill

And many deductions on the state income tax will be disallowed, including deductions for taxes paid, medical expenses, casualty and theft losses and interest expense on investments.

The increase in the cigarette tax, from 60 cents per pack to $1.10 per pack, would generate about $132 million more in revenue in 2019, and decline to $112 million in 2020.

Health advocates who had lobbied for a cigarette tax of at least $1 a pack were disappointed.

“A 50-cent cigarette tax increase is a missed opportunity,” said Tonya Chang, with the American Heart Association. “It will do nothing to reduce youth smoking or help adult smokers quit.”

A $1 a pack increase would bring in an additional $266 million a year in revenue, according to health advocates, and would significantly cut Kentucky’s rate of adult smoking, the highest in the nation, as well as its high rates of smoking-related death and disease.

Chang said the lower increase proposed by the Senate won’t affect Kentucky’s high rates of smoking-related death and disease.

Stivers said the Senate Republicans settled on the sales taxes on some services and other changes as “the most fair and the most equitable” as well as those most likely to bring revenue growth.

But Democrats complained that the reduction in the top income tax rate from 6 percent to 5 percent, and some other changes, would shift Kentucky's tax burden from the rich to the poor.

Currently, the state tax code applies the 6 percent rate to income of more than $75,000. Rep. Jim Wayne, D-Louisville, said all significant savings will go the "the top 5 percent of income earners" and those with the highest 1 percent in income will save $6,305 a year.

"This is a Trump tax plan," said Sen. Reginald Thomas, a Lexington Democrat and a candidate for the Democratic Party primary for the 6th District Congressional seat. "... All this does is support the wealthiest and richest among us."

Democratic Senate Leader Ray Jones of Pikeville objected over minority members being excluded from the budget discussions. Jones said the budget was crafted behind closed doors with "a legion of lobbyists."

But Senate Majority Leader Damon Thayer said Income tax reduction will keep $500 million a year in the pockets of Kentucky taxpayers.

Thayer said the bill broadens the tax base and lowers rates in a way that will make Kentucky more competitive with its neighboring states in attracting jobs. And, addressing teachers in the gallery, he said it raises additional revenue needed for schools and other priorities.

"They've asked us to find funding first," Thayer said referring to a slogan of opponents of last week's pension bill. "That's exactly what we do here."

Both the tax and budget bills have completed the legislative process and were sent to Bevin Monday night. ill go to the desk of Bevin, whose statement Monday expressed displeasure, but did not expressly promise any vetoes. If Bevin vetoes the tax bill, or any items in the budget bill, lawmakers can consider overriding the vetoes when they reconvene for the session's final day on April 14.

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Tom Loftus: tloftus@courierjournal.com; Twitter: @TomLoftus_CJ. Support strong local journalism by subscribing today: www.courier-journal.com/toml.