Republican Proposals to End Tax Breaks Could Create a Better Budget
March 14, 2018
Several bills sponsored by Republicans this legislative session include proposals to end a variety of tax breaks in order to generate additional revenue. If the General Assembly were to pull those and other specific revenue-generating ideas together into a plan, it could result in a significantly better budget than what is now on the table.
House Bill 585 sponsored by Rep. Couch, House Bill 366 sponsored by Rep. Rudy, House Bill 609 sponsored by Rep. Santoro and House Bill 599 sponsored by Rep. Petrie contain provisions ending or limiting a number of tax expenditures. In total, the trimming of tax expenditures included in these bills would raise hundreds of millions of dollars if they were brought together in one piece of legislation (without the portions of some of these bills that reduce rates or provide new tax expenditures). Combining these revenue-raising ideas would go a long ways toward limiting harmful budget cuts and providing resources to make the public investments that will help our economy grow and our communities thrive.
If the General Assembly does pursue legislation ending tax expenditures, it is crucial the legislation does not also include new tax breaks or a reduction of tax rates on income and corporate taxes. With the exception of HB 609, the bills mentioned above do include some provisions that in themselves would result in less revenue. HB 599’s deep, harmful cuts to income tax rates (as well as corporate tax rates) and shift to a higher sales taxes would be especially damaging. Those rate changes would cut taxes for the wealthy while raising them for low- and middle-income Kentuckians, and would leave the state with far less revenue and a worsened budget crisis. HB 585 also slightly expands the subsidy in the film tax credit for distressed counties when it should be suspended (and ultimately ended) as proposed in HB 366 and HB 599.
Details about how each bill would clean up tax breaks to generate revenue are provided below, with estimates of potential revenue impact in parenthesis where available.
House Bill 585
- Deletes 50% credit for producers of less than 300,000 barrels of malt beverages (+$60,000).
- Returns tax on beer, wine and distilled spirits to 11%, ending a scheduled phase-down.
- Deletes alcohol tax exemption for small wineries (+$300,000).
- Reduces the cap on historic preservation tax credit from $5 million to $4 million.
- Removes special rate for domestic production activity credit (+$11.4 million).
- Disallows 50% deduction for patronage dividends (+$6.1 million).
- Disallows dividend paid deduction for real estate investment trusts (+$13.2 million).
- Reduces the cap on the biodiesel and renewable diesel tax credit from $10 million to $5 million, and reduces the credit from $1 to $0.50 per gallon.
- Reduces the cap for cellulosic ethanol from $5 million to $2.5 million, and reduces the credit from $1 to $0.50 per gallon.
- Reduces annual ethanol tax credit cap from $5 million to $2.5 million, and reduces the credit from $1 to $0.50 per gallon.
- Reduces the amount of credit eligible under the Kentucky Business Incentive program from 100% to 75% of total investment in non-distressed counties.
- Repeals railroad tax credits (+$3 million).
- Repeals railroad credit for transporting fossil energy resources (+$2 million).
- Reduces credit for recycling equipment (+$2.2 million).
- Reduces dealer compensation from the fuels tax (+$2.6 million).
- Repeals limited liability entity tax exemption for personal service corporations (+$2.1 million).
- Freezes the real property tax rate and allows property tax revenue to grow 5% a year as opposed to current cap of 4%.
- Increases the state real property tax rate from 12.2 cents to 12.7 cents per $100.
- Increases the property tax rate against industrial revenue bond leasehold interests (+$1.8 million).
- Increases a number of business property tax rates that are set at special low rates (+$46 million).
- Deletes lower rate for operating property of railroads (+$22,000).
- Imposes the sales tax against charges for installation and repair of taxable goods (+$325 million).
- Deletes sales tax exemption for semi-trailers (+$6 million).
- Deletes sales tax exemption for locomotives and rolling stock (+$11.5 million).
- Deletes sales tax exemption for insecticides.
- Deletes sales tax exemption for farm machinery.
- Narrows sales tax exemption for on-farm soybean and grain to structures for storage.
- Narrows sales tax exemption for on-farm facilities for raising poultry to structures.
- Deletes sales tax exemption for aircraft and repair and replacement parts for aircraft (+$16.3 million).
- Narrows sales tax exemption for various livestock expenditures to structures.
- Deletes sales tax exemption for horses except for those boarding and training and in temporary use for racing, exhibiting or performing.
- Repeals sales tax exemption for vessels and maritime supplies (+$6.4 million).
House Bill 366
- Ends a $10 personal income tax credit that only goes to people above the poverty line (+$55 million).
- Suspends new film tax breaks for two years.
- Suspends new tourism tax breaks for two years.
House Bill 366 also raises the tobacco tax and puts in place a tax on opioid prescriptions, which the Legislative Research Commission estimates could potentially raise more than $150 million and help the budget in the short term. It also raises the waste tire fee to generate $3 million.
House Bill 609
- Raises the floor on the gas tax from $2.177 to $2.90 per gallon.
- Raises the minimum supplemental highway user motor fuel tax to $0.085 per gallon on both gasoline and special fuels from $0.05 on gasoline and $0.02 on special fuels, and indexes increases in the rates based on the National Highway Construction Cost Index.
- Establishes fixed fees of $50 for hybrids, $100 for hybrid electric plug-ins and $150 for nonhybrid electric vehicles, with annual adjustments as above.
- Increases licensing and other fees including fines and reinstatement penalties.
House Bill 599
- Eliminates special lower property tax rate for aircraft used in the business of transporting people (+$1.7 million).
- Deletes sales tax exemption for purchase of tombstones (+$8.5 million).
- Deletes sales tax exemption for machinery and equipment used for recycling.
- Deletes exemption for sale of horses less than two years of age (+$16.5 million).
- Suspends film industry sales tax credit for two years.
- Retroactively suspends other film industry credits.
- Retroactively suspends tourism tax breaks.
- Reduces income tax exclusion for retirement income to $31,100.
- Deletes exclusion of 50% of the capital gain from sale or exchange from income tax (+$191 million).
- Suspends the income tax credit for recycling equipment.
- Retroactively suspends the historic preservation tax credit.
- Suspends the 1% reimbursement for alcohol wholesalers (+$1.5 million).
- Deletes the 5% credit for paying inheritance taxes within 9 months (+$1.2 million).
- Suspends the railroad tax credit for the biennium.
- Suspends the tax credit for fossil energy or biomass resources for the biennium.
- Disallows deduction of transportation expenses in determining the base for coal severance tax and other severance taxes.