By Beth Musgrave
FRANKFORT — A commission that has spent the better part of a year evaluating Kentucky’s tax system recommended a 40-cent increase in the cigarette tax on Monday but no increase in the 6 percent sales tax.
Gov. Steve Beshear’s Blue Ribbon Commission on Tax Reform also recommended pursuing a constitutional amendment that would allow cities to seek a local-option sales tax for limited periods of time. The local-option sales tax has been requested by city officials for decades as a means to generate revenue for infrastructure improvements, such as new arenas.
The commission, headed by Lt. Gov. Jerry Abramson, includes 16 business and community leaders and six non-voting members of the legislature. It’s next and final meeting will look at proposals to alter the state’s income tax. Beshear has pushed back the group’s deadline for a final report from Nov. 15 to Dec. 15.
Beshear has not said whether he will take the commissions’ proposals to the legislature when it convenes in January. He has hinted at the possibility of a special legislative session to tackle tax reform.
Consultants hired by the commission this summer told the group that Kentucky must dramatically alter the way it taxes businesses and people if it wants state revenues to grow with the economy in coming decades.
The consultants said Kentucky’s tax structure, which relies heavily on personal and corporate income taxes, is not growing to meet the needs of its citizens. By 2020, the gap between what the state needs to provide basic services and the revenue it generates will be $1 billion, the report projected.
Kentucky’s tax code has not had a major update in decades. It still taxes based on agriculture and manufacturing models, the report found. That means vast sections of Kentucky’s economy is not taxed.
The commission has been debating for several months key issues of taxation, such as adequacy, fairness and keeping Kentucky competitive with other states.
Retiring state Rep. Bill Farmer, R-Lexington, told the commission Monday that raising the cigarette tax — currently at 60 cents a pack — is one tax hike he can support.
“This is not a tax policy but a health policy issue,” Farmer said.
Commissioner Sheila Schuster, a health care advocate, called for a $1 increase in the cigarette tax, noting that large increase would deter juveniles and pregnant women from smoking. Her motion failed.
Greg Harkenrider, deputy executive director for financial analysis, said raising the tax too high could result in a decrease in state revenue.
Ultimately, the commission voted to recommend increasing the cigarette tax by 40 cents to $1 a pack. That would generate an estimated $120 million a year for the state. The commission also voted for a comparable tax increase for other tobacco products, such as snuff.
Ohio’s sales tax on cigarettes is $1.25. Indiana is at 99 cents, Harkenrider said.
Commissioners voted down any increase in the 6 percent sales tax but approved recommending an additional 1 percent gross receipts tax on utilities for homeowners and businesses. Currently, businesses pay a 6 percent tax on utilities and up to 3 percent more for local schools. Homeowners can pay up to 3 percent for local schools.
Luther Deaton Jr., president and CEO of Central Bank, expressed concern about placing an additional 1 percent tax on businesses, but Harkenrider reminded the commission that in previous meetings the group had recommended lowering many other business taxes. If those recommendations are approved by the legislature, businesses will likely see a tax savings.
Stu Silberman, director of the Prichard Committee for Academic Excellence and a former Fayette County schools superintendent, recommended the additional 1 percent tax go to the main funding formulas for K-12 schools. The commission ultimately agreed.
The task force voted against changing a sales tax exemption involving thoroughbred horses. If a horse is purchased in Kentucky but moved to a different state, the buyer pays no sales taxes. But if the horse remains in Kentucky, sales taxes apply.
Farmer said the horse industry likes the loophole because it encourages horse sales at Keeneland and Fasig Tipton. Closing the loophole “would negatively affect sales in Kentucky,” Farmer said.
Rep. Jim Wayne, D-Louisville, said he believed there would be no political will in the legislature to close the loophole.
Wayne, a non-voting member of the commission, was one of the most vocal critics of allowing local-option sales tax, noting that sales taxes impact the poor disproportionately.
“It’s a regressive tax,” Wayne said.
If local-option sales taxes are approved, infrastructure improvements will be paid for by the working poor, Wayne said.
Commissioner John Williams countered Wayne’s opposition, saying two different local-option sales taxes in Florida have funded technology and infrastructure improvements for local schools.
Monday’s recommendations come on top of several others made by the panel over the past few months. Some of those recommendations include changing the way pensions and Social Security benefits are taxed.
Currently, the state exempts $41,110 in pension benefits from taxation. The commission has recommended dropping that threshold to $15,000. Social Security benefits would be taxed based on the federal government income tax model, which only taxes those in higher tax brackets.
The group also has recommended extending the sales tax to some services, but ruled out the tax for certain business-to-business services. The group also decided against adding the 6 percent sales tax to groceries.