The Kentucky General Assembly ended the 2019 session with the passage of a pair of so-called tax “clean up” bills that make Kentucky’s precarious revenue situation worse.
The first bill, HB 354, started out with the goal of addressing unintended consequences and administrative issues with the tax bills legislators hastily passed at the end of the session last year. However, the final bill ended up adding more than $106 million in new tax breaks for special interests to Kentucky’s tax code, with most of its content added in free conference committee just a few hours before it passed both chambers of the legislature. Mirroring the rushed process for the 2018 tax bills that led to the unintended consequences that necessitated edits this year, HB 354 as passed was unveiled and sent to the Governor’s desk on the same day, leaving no opportunity for public review or comment.
Not surprisingly, the second tax “clean up” bill – HB 458 – was described as necessary to correct unintended mistakes caused by the hasty passage of HB 354 just a few weeks earlier. HB 458 was passed in the final hours on the last day of the session, once again with no public review or comment. And once again, in addition to correcting mistakes, HB 458 added even more special interest tax breaks that will cost $3.6 million in the first year.
Because tax breaks reduce the General Fund revenue that we have to spend through appropriations, we should consider their costs in relation to our budget. Giving more tax breaks to corporations is a choice to use scarce resources to subsidize the private sector, rather than supporting pressing public needs. To put the cost of the new tax breaks in context, HB 354 and HB 458’s estimated annual fiscal impact of $110 million is more than what the state will spend on preschool and extended school services like afterschool programs this year ($108 million).
So who are the big tax cut winners from the 2019 session? Not surprisingly, the biggest beneficiaries are corporations. Their lobbyists consistently push for new exemptions and exclusions, including to scale back some of the provisions enacted last session that would have brought in new revenues – and they were very successful. Here is partial list of the big winners:
- Banks – The biggest winners of all, banks will see their taxes cut nearly in half at an estimated cost of $56 million at full phase in;
- Large, Multistate Corporations – Out-of-state corporations who do business in Kentucky, and therefore rely on the public investments in things like education and infrastructure, received a big state tax cut and more favorable filing rules in 2018, (in addition to huge federal tax cuts). But that wasn’t enough – they started pushing back immediately against one of the few bright spots in the 2018 state tax law – the requirement that multistate corporations file using combined reporting, a model method used to prevent corporations from shifting income between states to avoid income taxes. The legislature substantially weakened the 2018 provisions in both HB 354 and HB 458, allowing these large, multistate corporations to continue taking advantage of tax havens in no- or low-tax jurisdictions, creating new deductions, and allowing more generous sharing of tax reducing factors among related companies;
- Heavy Equipment Leasing Companies – Companies that lease heavy equipment will receive a substantially reduced state property tax rate, and will eventually receive an income tax credit for every dollar paid in property taxes on the leased equipment;
- Tollers – Tollers are companies that process raw materials owned by others. The 2018 tax law made it more difficult for tollers to qualify for an existing energy-related sales and use tax reduction. But because they complained, the General Assembly allowed companies currently in the business to keep claiming the credit, while requiring new companies that enter the business to apply the more rigorous standards.
- Other Miscellaneous Tax Break Beneficiaries – None of these are big individually, but collectively, they add up:
- Companies that purchase materials and equipment through more generous income tax expensing provisions;
- People who borrow money for activities like flipping houses;
- People who place losing bets at the track; and
- People who enter for-profit fishing tournaments or pay to dock boats at boat ramps.
Two bright spots in HB 354 are language that will require marketplace providers like Amazon to collect and remit sales tax for sales made using their platforms, and language that will subject streaming services such as ‘multichannel video programming’ to the communications tax. New revenue from these provisions is sorely needed to help shore up our General Fund and to support appropriations already made in the 2018-2020 budget. However, the amounts generated are far less than the cost of the long list of new and unnecessary special interest tax breaks in the two bills.
Research does not support the claim that tax breaks help to grow jobs, but they do make it hard for states to invest in the building blocks of growth. We will see how hard when the General Assembly reconvenes to write a new two-year state budget in January with significantly less revenue available.