A tax reform plan unveiled by Gov. Steve Beshear Tuesday would expand the state’s sales tax to services such as car repair and software installation.
The plan institutes over twenty changes – from creating a state-level earned income tax credit for the working poor to taxing e-cigarettes for the first time. The ultimate goal, Beshear said, is to widen the tax base while making the tax code more responsive to Kentucky's increasingly service-based economy.
"From a sales tax standpoint, our tax base is eroding every day," he argued.
Services that could see the 6 percent sales tax added include car maintenance and repairs, software installation, golf courses, country clubs, and landscaping work. Beshear said his plan focuses on services that are not "mobile," meaning they are more likely to remain in-state.
Individual income taxes would go down as well, with the top corporate rate moving from 6 to 5.9 percent. A refundable earned-income tax credit would be implemented at 7.5 percent of the federal credit.
Prospects for the tax reform plan are unclear as both parties look to capture the House this November.
"Talking about it doesn't get it done. At some point we all have to sit down and that's the only way it's going to get done," Democratic Rep. Rick Rand says. The lawmaker acknowledges that its politically risky to enact tax reform in an election year, but he cautions that the package, which he plans to introduce in the House Committee on Revenue and Appropriations next week, only represents a starting point for negotiations.
For his part, Beshear has vowed to continue the push for tax reform even if the legislature does not act this session.
Full details of the governor's tax reform plan are below:
Creates a Tax Code that Competes for Quality Jobs:
· Reduces individual income tax rates. When coupled with existing Family Sized Tax Credit, the proposed Earned Income Tax Credit, and the new Hold Harmless credit, every working Kentuckian will benefit from this rate change proposal.
· Enacts a Refundable Earned Income Tax Credit (EITC) at 7.5 percent of the federal credit. This tax credit is targeted to low-wage earners, and research shows the EITC will be reinvested in local communities, which stimulates the economy.
· Lowers the top corporation income tax rate from 6 percent to 5.9 percent
- Phases in ‘single factor apportionment’ solely on sales for corporation income tax
- Creates an angel investor tax credit
- Expands the state’s Research and Development tax credit to human capital
- Doubles the New Markets Tax Credit
- Exempts inventory from state property tax
- Eliminates selected negligible state property tax rates for tangible personal property
Helps Kentucky’s Signature Industries Thrive and Expand
- Creates an income tax credit for the bourbon industry
- Exempts sales and use tax on certain equine products, similar to other livestock
- Exempts sales tax on pharmaceuticals for food animals
- Lowers wholesale tax on beer, wine and distilled spirits
- Repeals the distilled spirits case sales tax
Creates a Healthier Kentucky Workforce to Attract Jobs
- Increases tax on cigarettes to $1
- Increases tax rate on other tobacco products commensurate with cigarette rate increase
- Creates tax on e-cigarettes at 20 percent of value
- Restores cigarette rolling papers tax
Modernizes Code to Acknowledge Changes in the Economy and Technology
- Broadens the sales tax to include selected services. Kentucky long ago moved from a goods-based economy to a services-based economy, but the tax code has not adapted to this transition. This proposal expands the sales tax to the labor associated with installation and repair of taxable goods, certain recreational activities, and certain commercial, residential and personal services. Additional information is attached.
- Clarifies that the sales tax is applicable to all prewritten software, regardless of delivery method. This addresses new challenges for the sales tax created by sales on the digital cloud.
- Applies sales tax and transient room taxes to the entire hotel accommodation price. This modernization proposal clarifies that all amounts paid for staying in a Kentucky hotel or similar accommodation, including amounts charged or retained by online travel companies, are included in the tax base for the sales tax and state and local transient room taxes.
Modernizes Code to Acknowledge Changing Demographics, Differences with Other States
- Reduces retirement income exclusion for taxpayers with a federal AGI of more than $80,000; phases it out for AGI over $100,000. This proposal still keeps Kentucky’s tax code among the friendliest for retirees. Social Security benefits are currently not taxable in Kentucky and would not become taxable under this proposal.
- Phases out $10 Individual Income Tax Credit
- Requires same income tax filing status for married couples at state level as federal level