This week, the General Assembly passed HB 354 – which started out as a bill to address unintended consequences and administrative issues with last year’s hastily passed tax bill, but ended up adding more than $106 million in new tax breaks for special interests to Kentucky’s tax code.
Kentucky is growing accustomed to the General Assembly giving away tax dollars through new carve-outs every year, despite the fact that we have too little revenue to buy textbooks for kids, pay for professional development for teachers, adequately fund our justice system, fix our outdated water systems or provide sufficient mental health and substance abuse services for people fighting addiction.
Because tax breaks reduce the very same General Fund revenue that we invest 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’s estimated annual fiscal impact of $106 million is just short of what the state spends on preschool and extended school services like after school in a year ($108 million in 2019).
The biggest winners in HB 354 are the banks, which will receive a tax cut of roughly 50 percent at a cost of $56 million. This cut – from repealing the bank franchise tax and instead taxing banks (all of them, not just community banks) through the corporate income tax – comes despite the fact that banks are experiencing healthy profits and were one of the biggest beneficiaries of 2017’s federal tax cuts.
The remaining tax expenditures in HB 354 are for a variety of corporate and individual special interests. Combined reporting language passed in 2018 is weakened, making it easier for corporations to shift income to tax havens and lower tax jurisdictions. Tax cuts are provided for companies that lease heavy equipment and that process raw materials owned by others. Deductions are added for people who place losing bets at the track, and who borrow money for activities like flipping houses, and the amount that companies can expense rather than depreciate when buying equipment was quadrupled. Those who enter for-profit fishing tournaments or who pay to dock boats were also exempted from paying the sales tax. Again for context, the amount the General Assembly decided to spend on these tax breaks exceeds the $49 million total appropriated for school districts’ Family Resource and Youth Service Centers across the commonwealth in 2019.
The content of this 200 page bill is concerning, as is the process by which it advanced through the General Assembly. Most notably, the provisions that significantly change the taxation of the entire banking industry should have been carefully reviewed and publicly discussed with input from those on all sides of the issue – not just the banks and their lobbyists. Instead, there was never a committee hearing on the idea or a bill introduced, and details of the proposal were not even available to conferees at the time they reached their agreement – just a general description of what the changes would be.
False claims were made that this change was about benefitting community banks, when more than half of bank deposits in the state are held by banks chartered elsewhere, with the state’s biggest banks being PNC and JP Morgan Chase. Those mammoth corporations stand to gain from the bank tax cut. But without an opportunity for public input, the misleading claims lobbyists were making had no opportunity to be corrected.
The cost of HB 354 would’ve been even higher if it didn’t require marketplace providers like Amazon to collect and remit sales tax for sales made using their platforms and make streaming services subject to the communications tax. But instead of using these resources to help shore up our General Fund, the revenue is just going toward the tax breaks.
Research does not support the claim that tax breaks help states’ economies, but they do make it harder for states to invest in the building blocks of growth. Consider one final bit of budgetary context; the General Fund revenue we are losing through HB 354 is enough to pay for 1,635 teachers – or an average of about 14 teachers per district.
This column ran in the State-Journal on March 27, 2019.
