Despite receiving a tax reform proposal from Governor Beshear back in January, there’s been little discussion about the need for comprehensive reform in this year’s General Assembly. In fact, the state hasn’t even released its report on what Kentucky loses in tax expenditures, even though it was due November 30. The revenue discussion instead has focused on House Bill 445, a bill that generates a small amount of additional revenue primarily for the Road Fund, and several pieces of legislation that will result in lost state revenue in future years.
Protecting the Road Fund
House Bill 445 passed the House by a slim margin of 53-44. It raises the gas tax by 1.5 cents per gallon above its current rate and 2.2 cents per gallon above the rate that will go into effect on April 1. That returns the gas tax to its level at the end of 2013. The bill also raises the floor of the minimum average wholesale price used to calculate the rate to keep the rate from dropping should gas prices decline.
The gas tax proposal would raise $60.8 million a year by the second year of the budget. It comes on the heels of a cut of $34 million to the Road Fund in the 2013 General Assembly, when the legislature created a trade-in credit against the motor vehicle license tax on the value of a used car when purchasing a new car.
In recent years, the Road Fund has achieved stronger revenue growth than the General Fund in part because the gas tax is tied to the price of gasoline and that price has been elevated since 2011. However, the gas tax is impacted by rising fuel efficiency; taxable gallons of gas have declined just over one percent a year on average for the past eight years. And without House Bill 445, as mentioned, the gas tax is vulnerable to drops in the price of gas. The floor—below which the wholesale price used to calculate the gas tax cannot drop—is still at $1.786 while the current price is $2.878.
Temporary boost to the General Fund
House Bill 445 also includes a few measures that provide a temporary revenue boost of $23.2 million to the General Fund to be used this biennium, while being revenue neutral over the long term. The primary revenue source here involves the sale of abandoned property, which is expected to generate $20 million in one-time money.
Also included are measures that simplify, update and clarify various aspects of the tax code.
One measure would update the state’s income tax’s link to the federal tax code. The state’s code has been tied to the federal Internal Revenue Code as it existed on December 31, 2006, which makes compliance more and more complicated as time goes on. The state wisely does not automatically conform each year because that gives Kentucky the opportunity to choose whether or not to go along with specific changes made by Congress. The legislature has not brought the state’s link to the federal code up to date in recent years because doing so would have resulted in lost revenue due to temporary federal tax cuts passed to stimulate economic activity during the recession and its aftermath.
However, many of those stimulus measures have expired and the state can update to the current code without a big cost to the budget. House Bill 445 proposes updating to the code as it stood on December 31, 2013. Importantly, House Bill 445 does not conform to a change in the limit on itemized deductions for high-income people that was made at the federal level, which would have cost the state budget money while giving a tax break to the richest Kentuckians.
Among other changes in House Bill 445: it responds to lawsuits challenging the legality of the method used by library districts to set property tax rates, making it clear that districts’ past decisions were legal (thus avoiding big cuts in library revenues); clarifies that taxes on instant racing are legal in response to a court case that said the state did not have that authority already; allows the lottery to advertise that (most of) its net proceeds go to college scholarships, generating a little more revenue; and extends the film tax credit but lowers the cap on credits that can be used.
New tax breaks
As in the past, the 2014 General Assembly contains numerous bills that will provide new tax breaks to various industries, individuals or activities. Most of those have not moved forward, but tax break bills that have had some movement include the following:
- House Bill 376, which provides an income tax credit for the donation of property (or an easement on property) for land conservation, is expected to cost $2 million a year at full implementation and has passed the House Appropriations and Revenue (A & R) Committee;
- House Bill 474, which provides sales, corporate and individual income tax incentives to coal mining and processing facilities. This bill has also passed the House A & R Committee;
- House Bill 396, which provides tax incentives to General Electric in Louisville, has an expected eventual fiscal impact of $15 million a year and has passed the House;
- House Bill 483, which provides tax incentives for AK Steel, has an expected eventual cost of $2.088 million a year and has passed through House and has passed the Senate A & R Committee.
- House Bill 493, which makes smaller tourism projects in higher-poverty counties eligible for tourism tax incentives. It has passed the House A & R Committee.
Tool to understand tax break spending is missing
While Frankfort observers watch and await the creation of a new state budget, the state’s other budget—the one most people don’t even know about—also hasn’t been completed. That’s the state’s biennial report on the revenue that is lost each year from tax expenditures.
Tax expenditures are the tax exemptions, incentives, credits and preferential rates that are buried in the tax code and are a way the state spends money just like appropriations through the budget. In fact, according to the last tax expenditure report the state has about $15 billion a year in tax expenditures—more than it spends through the General Fund.
As has been past practice, the law containing the last state budget included instructions for the governor’s budget office to produce the report by November 30, 2013. That date is important because it gives the General Assembly the information before the session, allowing legislators to weigh the cost of various tax expenditures against the cost public programs and services as they develop a new two-year budget. But the legislative session is nearly over, and the report still has not appeared.