- Associated Press - Tuesday, February 4, 2014

FRANKFORT, Ky. (AP) - Gov. Steve Beshear proposed updating Kentucky’s tax code on Tuesday with a far-reaching plan that would reduce tax rates for individuals and businesses, extend the state sales tax to more services and expand tax credits to encourage job growth.

The plan would generate nearly $210 million more in state General Fund revenues each year once fully in effect, the governor said in unveiling his long-awaited plan.

Smokers would pay a higher state tax rate for each pack of cigarettes they puff. Higher-income retirees would have their pension income tax breaks reduced.

And the state’s 6 percent sales tax would be extended to such services as the cost of labor for car repairs and admission to golf courses, country clubs and fitness centers. Other services targeted would include landscaping, janitorial and tanning salons.

Kentucky’s renowned bourbon and horse industries would receive tax breaks as part of the 22-point plan presented by the second-term Democratic governor.

Beshear said his plan would modernize an outdated tax system, enhancing the state’s competitiveness while guaranteeing sufficient revenues to run state government.

“I think this proposal makes sense,” the governor said at a Capitol press conference. “I think it’s fair. I think it’s equitable to everybody.

“And I think it does what ultimately we want, and that is to have a modern tax code for Kentucky that will create revenues as the economy grows and will attract new jobs.”

Beshear’s proposal will be introduced by House Appropriations and Revenue Committee Chairman Rick Rand, who said the panel will start hearing testimony on the measure next week.

The 60-day General Assembly session is one-third complete, leaving lawmakers plenty of time to debate and vote on a tax reform package, Beshear said.

Beshear said he recognized the challenges of enacting tax changes in an election year for the politically divided Legislature. All 100 seats in the Democratic-led House and half the seats in the GOP-controlled Senate are on the ballot this year.

He said he was open to discussing other ideas with lawmakers to change the tax code.

“We’ve got to find common ground if we’re going to have any success,” Beshear said.

To keep the tax issue from being exploited for political gain, the governor said he would not request a vote in either legislative chamber unless a plan gains majority support.

House Speaker Greg Stumbo later praised parts of Beshear’s plan but was skeptical of others - including the proposed tax break for the state’s booming bourbon industry.

“Somebody’s going to have to explain to me why they need a tax break,” he said.

Stumbo, D-Prestonsburg, said the chances of passing a tax plan that increases General Fund revenues by about $210 million a year would be “daunting.”

Senate President Robert Stivers said the bourbon sector proposal was among the aspects of the plan that would promote “a more business-friendly tax code.”

The state’s bourbon industry has been seeking a corporate income tax credit to offset the taxes it pays every year on whiskey barrels aging in warehouses. Under the industry’s proposal, distilleries would have to reinvest the credit in their Kentucky operations.

Stivers, a Manchester Republican, was critical of the governor’s proposal to raise the state cigarette tax to $1 a pack from 60 cents. Stiver called it a “flawed premise,” saying the higher proposed rate would shrink the amount of revenue.

Kentucky remains the nation’s top producer of burley tobacco, used in many cigarettes.

Beshear, a former smoker, said high smoking rates among Kentuckians contribute to the state’s many health woes.

“If we can do anything to discourage smoking, and if raising the cigarette tax will discourage smoking, then I’m all for it,” the governor said.

His proposal would raise the tax rate on other tobacco products and would create a tax on e-cigarettes. The smoking-related tax changes would generate an estimated $124.5 million in yearly revenues.

Meanwhile, Beshear’s proposal would lower the top state corporate income tax rate to 5.9 percent from 6 percent.

The plan would create a refundable state earned-income tax credit benefiting low-wage earners.

Extending the sales tax to apply to more services would raise nearly $280 million more per year in General Fund revenue once fully implemented.

Beshear proposed applying the sales tax to labor costs to repair automobiles, computers and electronics as well as installation, repairs and maintenance of machinery and equipment.

Mike White, co-owner of Performance Auto Care in Shelbyville, said adding the sales tax to labor costs would be a hardship for customers.

“You get a major repair job, that can add up pretty quickly,” he said.

The state sales tax already is applied to the cost of parts during car repairs.

Under Beshear’s proposal, the sales tax would also be stretched to include admission fees to fitness and recreational centers, golf courses and country clubs, boat dock slip rentals and storage and overnight trailer campgrounds.

The state sales tax rate would be unchanged.

The proposal also would affect retirees by reducing pension income tax breaks for people with annual gross income of more than $80,000. The tax breaks would be phased out for income over $100,000.

Beshear said the proposal would affect about 90,000 of the state’s 1.8 million tax filers. Social Security benefits would remain exempt.

For businesses, his proposal would create various new tax credits to encourage investment in small businesses and high-tech research, Beshear said.

A change in the corporate income tax formula for some multi-state companies with a sizable Kentucky presence could become a big job producer, he said.

Beshear’s tax reform proposal comes after he recommended $98.6 million in spending cuts in the two-year budget proposal he recently submitted to lawmakers. The cuts would free up more money for education.

Beshear has cut about $1.6 billion from the state budget since he took office in 2007, due to sluggish state revenues caused by the economic recession.

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