Tax Commission releases tentative recommendations; more work remains

The Governor’s Blue Ribbon Tax Commission met yesterday to continue developing recommendations of how best to update Kentucky’s tax code. After more than six hours of deliberating, the commission released its first round of “tentative recommendations,” but requested the Governor grant an extension of the November 15 deadline, allowing the commission to submit final recommendations at the end of this year. Some of the preliminary recommendations in the areas of income, corporate and sales taxes include:

Earned Income Tax Credit
An Earned Income Tax Credit (EITC) is currently being considered which would create a tax credit for small business and low income individuals by returning a portion of the income taxes they paid. The commission agreed to set a potential credit of up to 15%.

Retirement Income
Kentucky currently taxes all retirement income over $41,110 (per person), but not social security income. The commission is considering lowering the retirement income tax threshold to $15,000 and extending the income tax to federally taxable social security income as well.

Itemized Deductions
To ultimately broaden the tax base and raise revenue, the commission is considering disallowing 75% of itemized deductions including home mortgage interest deductions. Individuals could still potentially itemize state taxes, but only 25% of the amount paid would count.

Income Tax Rate
The income tax rate has caused some consternation for the group, as most would like to lower individual income taxes, but are unsure which method is the best way to do so. Commissioners considered a lower flat tax rate or a progressive tax rate of 5%, but left the decision unresolved until the next meeting.  Currently, Kentucky has a scale of six income tax rates. On that scale, income between $8,001 and $75,000 is taxed at 5.8% and income above $75,000 is taxed at 6%.

Sales Tax
Final recommendations on the expansion of the state sales tax to services were left open for a future meeting. The group agreed Kentucky should expand the sales tax to services, but time ran out on the deliberation on what services should be taxed and what exemptions should be created for business to business transactions.

Corporate Taxes
The commission voted to support change to Kentucky’s corporate income tax structure, a move supported by the Chamber. This would change the way corporate income is calculated for multi-state corporations to single-factor apportionment. This move would make Kentucky a more attractive place for companies to do business and not penalize companies located in the state. The group also supported an Angel Investor tax credit, something the Chamber strongly supported during the 2012 legislative session. The credit would encourage capital investment in Kentucky companies.

The next meeting date of the 17-member task force has not been set, but the Chamber will continue to play an active role in this debate and keep you informed of any progress.