Lawmakers agreed on tax reform package with addition of low-income tax credit and lowered tax rate for banks

In the free conference committee on tax reform Wednesday morning, lawmakers decided on a final tax reform plan, which they plan to vote on in the coming days.

After coming to an agreement on many of the differences in the House and Senate tax proposals on Tuesday, the group met at 8 am Wednesday to add new provisions to the bill to finalize their plan.

Among the biggest changes added to the bill, Kentucky banks will see a large decrease in their tax rate as the committee decided to move away from the bank franchise tax and put those banks under the 5 percent corporate income tax in the next budget cycle. Currently, those banks are subject to a tax rate of more than 13 percent, among the highest rates for banks in the country.

This will mean less revenue as the rate is decreased substantially, but legislative leaders described the change as helping small, community banks. Senate President Robert Stivers explained the state has struggled to keep those types of banks in Kentucky, as they avoid that tax rate by moving their assets and employees to a different state, which he believes this change will address. This change would go into effect in 2021 and in the transition year, banks will pay both the corporate income tax and bank franchise tax and then receive a credit. Learn more about the issue here. 

Language on combined reporting was also discussed with legislative leaders saying that they would not repeal the mandatory combined reporting requirement passed in the 2018 tax plan. The business community has advocated for the repeal of this item, as it puts Kentucky at a competitive disadvantage. Appropriations and Revenue Chairman Chris McDaniel mentioned that State Budget Director John Chilton sent legislative leaders a memo regarding combined reporting advising them to not exclude certain regulated businesses and they would be including those recommendations in their final report.

Meanwhile, after the individual income tax was lowered to a flat 5 percent for all Kentuckians in the 2018 tax reforms, lawmakers said they have found that some low-income Kentuckians were negatively impacted by those changes and have actually paid more in sales tax because of the change. Because of this, the committee added a new tax credit those few families would receive over the next two years to fill in that gap, and the issue will then be studied after the two years to monitor any changes in the federal poverty rate and other items that impact this issue.

Many other smaller changes were also made in the conference committee’s final changes to the tax reform package. Read what else is in the tax reform plan from Tuesday’s agreements on The Bottom Line here.

The amended version of the tax reform “clean up” bill, House Bill 354, will now go before both the House and Senate for a vote before heading to the governor. Veto days begin Friday, meaning they will have to pass this bill through both legislative bodies by Thursday evening in order to override a veto from the governor on the final legislative day on March 28.

The group also touched on the budget “clean up” bill Wednesday morning and after quickly noting some of the differences in the House and Senate proposals, they stated they would deal with this bill at a different time, likely on Thursday morning. The budget amending bill would also have to be done by Thursday in order to safeguard against a veto from the governor.

Stay tuned on The Bottom Line for more updates on these policies and any action in the final days of the 2019 session.

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Jacqueline Pitts
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