Kentucky to see tax reform, plan lowers individual rates and broadens base to some services

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A plan reforming Kentucky’s tax code and generating more revenue for the state was released Monday morning that would lower the individual income tax and broaden the sales tax base to new services.

The reform plan represents the first major changes made to Kentucky’s tax code in decades. The changes proposed in the plan would generate $238.8 million in 2019 and 248.1 million in 2020 for the state, totaling an increase of $486.9 million over two years for Kentucky.

Personal income tax will be lowered to a flat 5% for all Kentuckians rather than the current tiered brackets which are as follows:

$5,000 – $8,000 5.00%
$8,000 – $75,000 5.80%
$75,000+ 6.00%

This change would make Kentucky’s income tax the 10th lowest in the country. The same flat 5% income tax rate is being applied to the corporate income tax, which leaders say will improve competitiveness over the current 4%, 5%, and 6% brackets applied to corporations.

The cigarette tax is increased by 50 cents under this plan, which will bring Kentucky’s cigarette tax to $1.10 per pack, still below the national average. The tax, many argue, will not only bring in revenue for the state but will also improve health outcomes which could lower the cost of Medicaid and other areas.

Kentuckians will now see a sales tax applied to certain services where it has not previously been, which will help expand the state’s tax base. Currently, no services are taxes, leaving money on the table in the state. The services which will be taxed are as follows:

Landscaping Services
Janitorial Services
Pet Care Veterinarian Services (small animals)
Fitness and Recreational Sports Centers
Industrial Laundry Services (uniforms)
Golf Courses and Country Clubs
Dry Cleaning and laundry Services, except coin-operated
Pet Grooming and Boarding Services, except Veterinary Services
Linen Supply (bed linens, gowns, diapers, towels, excluding charitable hospitals)
Diet and Weight Reducing Centers (non-medical)
Overnight Trailer Campgrounds
Other Personal Care Services
Bowling Centers
Limousine Services
Extended Warranties

Sales tax will also be collected on internet sales.

The plan also simplifies the state’s tax system by removing many deductions for state income tax and will only allow for deductions relating to social security income, mortgage interest, and charitable donations. It also removes a $10 tax credit that has previously been allowed.

Kentucky’s tax code would also conform to the federal IRS codes adopted with federal tax reform in December 2017. Leaders stated this is important to the simplification of the tax code.

The state’s inventory tax would be phased out over a four-year period to allow local governments to conform to the change. Kentucky is one of very few states with an inventory tax and elimination would allow Kentucky to treat all businesses the equally.

Some of the state’s tax incentives, including the angel investor tax credit and others, will be suspended in order to get a thorough review of the programs.

The threshold on the pension income exclusion will also be lowered from $41,110 to $31,110, meaning if someone makes less than $31,110 in their retirement that income will not be taxed.

In explaining the plan, House Appropriations and Revenue Committee Chair Steven Rudy stated many tax experts say a good tax system is one that has a broad base and allows for low rates, is simple, and doesn’t impede economic growth.

Rudy said the state has needed comprehensive tax reform and that this proposal will move Kentucky closer to this goal.

The reform plan, in the state revenue bill House Bill 366, will be brought to the House and Senate floors for a vote Monday along with the next two-year state budget before both measures then move to the governor’s desk.

Keep checking The Bottom Line today for updates on these bills and others moving through the legislative process.

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Jacqueline Pitts
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