Kentucky Governor Steve Beshear recently unveiled his legislative plan for tax reform intended to strengthen the state’s ability to create jobs, expand existing industry, and ensure a healthier workforce and economy. The proposal includes tax changes anticipated to create additional revenue as the economy grows. However, the Governor stated that he “will not ask either chamber to vote on the bill or any version thereof unless a consensus has been reached on a proposal by a majority of both Houses which will assure its passage.” Highlights of the plan are as follows:
- Restructure individual income tax rates: Lowest rate would be 4 percent (income below $10,000) and the highest rate would be 5.9 percent (income over $100,000).
- Enact a Refundable Earned Income Tax Credit (EITC): Rate at 7.5 percent of the federal credit.
- Lower the top corporate income tax rate: Decrease from 6 percent to 5.9 percent.
- Phase-in single factor apportionment: Based solely on sales for corporation income tax; over a three-year period; change the existing cost-of-performance based formula for apportioning sales to incorporate a destination sourcing for services.
- Create an angel investor tax credit: Available for certain investments in small businesses.
- Expand the state’s R&D tax credit to human capital: The current credit is linked to construction, so this would expand the credit to salaries and consultants.
- Exempt inventory from state property tax (merchant’s inventory, manufactured finished goods, and goods stored in warehouse): One much-missed property tax savings technique is reporting inventory as “in-transit”. If you have inventory being held in Kentucky and it’s destined to be shipped out of Kentucky within six months from year-end, you can get a property tax reduction on that inventory.
- Eliminate selected negligible state property tax rates for tangible personal property: Emphasis is on classes of property subject to the “state rate” only.
- Broaden the sales tax to include selected services: In particular, the installation and repair of taxable goods, commercial and residential services, and several personal services would be subject to sales tax.
- Clarify that the sales tax is applicable to all prewritten software, regardless of method of delivery
- Reduce retirement income exclusion for certain taxpayers: Applicable to taxpayers with federal adjusted gross income (AGI) over $80,000 and phased-out for those with AGI over $100,000.
- Require same income tax filing status for married couples filing at the state level as at the federal level
