Kentucky Lawmakers Eyeing Sales Tax Increases On Services

Apr 2, 2018

Days after a surprise pension bill spurred thousands of teachers to march on the state Capitol, Kentucky lawmakers revealed another shock: A $480 million tax hike that would reduce income taxes for many while charging a 6 percent sales tax on things like auto repairs and fitness centers.

Credit Josh James / WUKY

UPDATE:

1:55 p.m.

The Kentucky Senate has approved a $480 million tax increase by voting to expand the state sales tax to a variety of services.

The Senate voted 20-18 to send the bill to the House of Representatives, which also plans to vote on the measure Monday.

Senate Democrats objected because they said they were shut out of the process and did not have time to read the bill. Republicans said the bill had to pass Monday to preserve their right to overturn any vetoes from Republican Gov. Matt Bevin.

The bill would impose the state's 6 percent sales tax on services including automotive repair and pet care for small animals. Kentucky residents would pay 5 percent of their taxable income to the state, down from 5.8 percent and 6 percent for most earners.

The increases would help pay for record-high spending in public school classrooms, plus restoring $254 million in money for school buses that Republican Gov. Matt Bevin had eliminated. The budget also pays for legal aid for poor people, a network of weather monitoring stations used to issue warnings about severe storms and a poison control hotline used by parents, teachers and police.

It's the first major overhaul of Kentucky's tax code since 2005 under then Republican Gov. Ernie Fletcher and it comes amid a budget crunch caused by stagnant revenues and a woefully underfunded public pension system. Republican Rep. Steven Rudy called it a "step to finally move Kentucky way up the ladder to competitiveness."

But Democrats denounced the bill for its secrecy, having been crafted by Republicans in private meetings that excluded input from the minority party. And Jason Bailey, director of the Kentucky Center for Economic Policy, said by expanding the sales tax lawmakers were relying on the state's lower-income population to fuel most of the increases.

Most of the new money would come from expanding the state's 6 percent sales tax cover a host of services that had previously been tax-free. They include landscaping, janitorial services, pet care for small animals, fitness and recreational sports centers, golf courses and country clubs, overnight trailer campgrounds and diet and weight-reducing centers.

Plus, the sales tax would apply services associated with "repair, installation and maintenance" of personal property. That would include auto and some home repairs. Republican House budget chairman Steven Rudy said the tax would not apply to a homeowner replacing a heating, ventilation and air conditioning system. But it would apply to replacing a part of that system, such as a compressor.

Gains in the sales tax would be offset by some reductions in income taxes for individuals and businesses. Kentucky residents would pay 5 percent of their taxable income to the state. Right now, most people pay 6 percent. Most people in the tax brackets below 5 percent that would be eliminated don't make enough money to pay taxes anyway, according to Republican Senate President Robert Stivers.

Jason Bailey, director of the Kentucky Center for Economic Policy, said that's not accurate. His organization is still analyzing how the proposal would impact Kentuckians, but he said some people just above the poverty line will have to pay more.

"The people who benefit from that are the rich," he said.

The plan eliminates most state tax deductions, including those for the cost of medical expenses, taxes paid and interest expense on investments. Deductions for social security, mortgage interest and charitable giving will remain.