Commission wants to lower Ky. taxes but spread them to new areas; Needs more time for final report

11/08/2012 06:13 PM

The Blue Ribbon Tax Commission on Thursday moved closer to hammering out recommendations that would change how Kentuckians pay taxes — potentially lowering their income rates but applying taxes to new areas, such as certain services.

The commission debated recommendations to send along to the governor on changing income tax rates, corporate taxes and sales taxes in their six-and-a-half hour meeting on Thursday. At the end of the meeting, the group officially requested more time to finish the recommendations after the Nov. 15 deadline Gov. Steve Beshear gave them.

Lt. Gov. Jerry Abramson, the commission’s chairman, struggled at times to move the group along and urged them to start making the tough decisions. He paced back and forth at a white board drawing up the options for the 17-member panel.

Here are some of the key recommendations that are being debated in the major categories of income, corporate and sales taxes:

Income Tax:

Earned Income Tax Credit

The group is considering an earned income tax credit, or EITC. It is designed to help small businesses and low income individuals by giving back a percentage of taxes paid. The group wants to give those who qualify 15 percent back as a tax credit. Rep. Bill Farmer, R- Lexington, made the suggestion at the October meeting and suggested the group consider an advanced payment option similar to the federal EITC.

Retirement Income:

Currently, Kentucky taxes all retirement income over $41,110 per person and does not tax social security income. The group heard from a professor in Bowling Green in June who said his family earns more than $100,000 in retirement income and he currently does not pay state income taxes.

The group is considering lowering the retirement income tax threshold to $15,000 — effectively taxing everything earned through pensions and other income. Federal Social Security income also would be taxed by the state under that suggestion the group is considering.

Itemized Deductions:

The group wants Kentucky to broaden the base of taxes by disallowing 75 percent of itemized deductions. In theory, one still could deduct items from state taxes but only 25 percent of them would be calculated in. By going to a broader base and collecting more taxes from retirement income and disallowing a high percentage of itemized deconstructions will allow the group would want lawmakers to lower the income tax rate …

Income tax Rate:

But the group is split on how to best adjust it. Members debated whether to adopt a lower flat tax rate or a progressive, or tiered, tax rate. The group’s members said they are interested in lowering income taxes, but not sure yet how the math will work at different rates and agreed to table the discussion until their next meeting.

Kentucky currently taxes income on six brackets at rates ranging from 2 to 6 percent. Everyone in the state earning more than $8,000 is taxed at a 5.8 percent flat rate and those making more than $75,000 rare taxed at a 6 percent rate.

Sales tax:

Rather than consider specific options such as – - taxes on limousines and country club dues – the group essentially punted to the governor and legislative leaders on how best to make specific changes. Instead, the commission derived a list of concepts that the governor and elders will look at when considering those options.

Rep. Jim Wayne, D-Louisville, argued during Thursday’s meeting that the commission needs to be cautious about sales tax because it can disproportionally affect the working poor — specifically the taxes on commonly-used services, such as car repairs. The group agreed Kentucky needs to expand the sales tax and that it should include services following these principles:

-10 or more states have similar tax – Household consumption base – Target luxury service items – Inelastic demand of products

Corporate Taxes:

The group ran through a laundry list of corporate tax changes and additions to the corporate tax structure. Some items were brought up and quickly dismissed, such as a public input request to review and close loopholes for the coal industry. That prompted little discussion because there were few loopholes in question. It was removed from the list under consideration. Other items, such as an angel investor tax credit program, was discussed at length.

The General Assembly considered the Angel Investor tax credit in 2012 but didn’t act on it. The credit seeks to encourage capital investment in Kentucky. While the group moved to include the idea in a list of recommendations to the governor, the commission is re-writing the policy to model it after other successful attempts at angel tax investing.


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