With New Tax Cut, Kentucky Revenue Will Reduce by $106 Million a Year

House Bill 354 contains changes to parts of the tax code that will mean less revenue for the state in coming years in exchange for tax cuts for banks, among others.
by | March 28, 2019 AT 7:35 AM

By John Cheves

Gov. Matt Bevin on Tuesday signed into law a measure that that will cost Kentucky's $11 billion General Fund an estimated $106.6 million a year once fully implemented.

House Bill 354 contains changes to parts of the tax code that will mean less revenue for the state in coming years in exchange for tax cuts for banks, among others. It also includes an exemption to the state's Open Records Act, sought by the Kentucky Department of Revenue, so the public no longer can request certain tax-related documents, such as final tax rulings and requests for tax guidance.

General Fund revenues already are expected to fall $22.1 million short of projections in the fiscal year that ends June 30, according to the state budget office, so another round of tax breaks is likely to mean more cuts to come in state programs, such as education and social services.

On a related note, the legislature has not acted on another measure, House Bill 517, that would have generated nearly $498 million in Fiscal Year 2021 for the state's road fund by raising the state's gas tax and fees on electric cars and license plate renewals. The bill was filed Feb. 20 but never left the House Transportation Committee despite requests for passage from the Bevin administration.

House and Senate negotiators put their tax cut plan in HB 354 together this month with assistance from the state budget office and the Revenue Department, as well as Frankfort lobbyists representing industries who want to pay fewer taxes.

Among those interests was the Kentucky Bankers Association, which has paid more than $180,000 since Jan. 1, 2017, in state political donations, spreading its money between Republican and Democratic members of both legislative chambers. Without any previously filed bill or public debate, it won a change in the tax code worth an estimated $56 million a year when it takes effect in 2021.

The KBA told lawmakers it wanted them to repeal the bank franchise tax, which is based on the size of net capital, in favor of the corporate income tax that most businesses pay. The corporate income tax is typically 5 percent, but the franchise tax, combined with local deposit taxes, can hit banks with an effective tax rate of more than 13 percent, the KBA told lawmakers.

Other states in the region tax their banks more lightly, putting Kentucky-based banks at a disadvantage, the KBA said.

Lawmakers sounded sympathetic.

"We've seen some (bank) buyouts because of that," Senate President Robert Stivers, R-Manchester, told other members of the free conference committee that wrote the tax bill. "It's a fairness issue and an equity issue to transition them from a franchise tax."

KBA President Ballard Cassady did not respond to a request for comment for this story.

But a critic of the tax bill said federal reports show that Kentucky bank profits topped $600 million in 2017, having strongly recovered from the Great Recession. Before the legislature gave away $56 million in annual revenue, it should have heard testimony at hearings to justify the change, said Pam Thomas, a tax analyst for the Kentucky Center for Economic Policy in Berea.

"The banks are essentially going to see a 50 percent tax cut," said Thomas, who previously wrote tax legislation as a staffer for the General Assembly.

"By keeping this all secret and hidden from the public until the very end, they pretty much negated the ability of anyone to push back and question any of it. The fact that it was passed this way -- by sticking it into a free conference committee report at the 11th hour -- tells you something," Thomas said.

Another big tax break was $52.2 million a year in income tax cuts. This included changes affecting a variety of taxpayers. Some are lower-income individuals who owe more because of changes the legislature made to the tax code in 2018. Others are multistate and multinational businesses that owe more under the "combined reporting" model the state adopted last year to reduce tax avoidance by companies that shift their income between related entities to find the lightest tax rate available.

Corporations have been lobbying against Kentucky's combined reporting model from the moment it passed, although more than two dozen other states already use it, Thomas said.

"This bill essentially weakens the law we passed just last year, which already was pretty weak to start with," Thomas said.

The bill also forgoes about $3.1 million a year in sales and use taxes, partly due to a tax break given to nonprofit groups for their special events. Lawmakers said they erred last year when they covered nonprofits with the expanded sales and use tax. But the bill also gives a tax break to fishing tournament fees and boat ramp fees, even when for-profit entities are involved.

(c)2019 the Lexington Herald-Leader (Lexington, Ky.)