Many different ideas have been discussed about how to increase state revenue. Yesterday evening, details were released about several revenue measures that are being proposed in Kentucky’s House of Representatives. These proposals, which are in House Bill 530, are part of the plan to balance Kentucky’s 2010 – 2012 budgets. Proponents of the changes say these revenue raisers are not tax increases. That sounds like an oxymoron, but for some of the proposals it’s true.
Net operating losses to be limited
The most significant proposed change is to suspend the utilization of corporate and individual net operating losses during the two years of the biennium – July 1, 2010 through June 30, 2012. Unfortunately, the two-year biennium spans three calendar years, so the suspension is effective for tax years 2010 through 2012. So, by my count, that’s a three-year suspension.
The summary of the bill says:
“Suspending the net operating loss deduction does not eliminate the benefit received by a business from a carry forward. It merely delays the benefit received by allowing the loss to be carried forward an additional time, equaling the time that the net operating loss deduction is suspended.”
To compensate for the suspension, the 20-year carryover period will be extended, but that will be of little comfort to those who end up paying more income during the three-year period. Because this change will adversely affect businesses that are already under financial stress, many will voice opposition to this proposal. Unfortunately, businesses affected by this change are already under severe financial stress. After all, they were losing money!
You decide – is this one a tax increase?
Sales tax remittances will be accelerated
Here is another one that may not be a tax increase, but it does adversely affect a business’s cash flow. Large retailers will be required to remit sales tax collections sooner. Currently, retailers who have taxable sales of $500,000 in a month, resulting in sales tax collections of $30,000 in that month, are required to remit sales tax electronically under an accelerated procedure.
To illustrate this proposal by way of an example, normal rules say that June sales tax receipts must be remitted by July 25th. Under the new rule for accelerated taxpayers, the amount due on July 25th will include any unremitted taxes from June, plus an estimate of sales tax collections for the entire month of July (taxes they have not even collected yet). The effective date for this change will be July 1, 2011 (16 months from now), and about 1,100 retailers will be affected.
Remittances of income tax withholding will be accelerated
Employers who withhold more than $50,000 from employee wages during a year (that’s an annual payroll of around $1,250,000), are now required to remit the money twice a month, with some of the tax being remitted shortly after the end of the month. The proposed change will require that all taxes withheld be remitted electronically before the end of the month in which the withholding occurred. Again, this is not a tax increase (?), just an acceleration of the payment to the state. This change will adversely affect cash flow and be an administrative burden. About 365 businesses will be affected.
Eliminate the scheduled increase in the Domestic Production Deduction
To compute Kentucky taxable income, the starting point is the federal taxable income. In 2006, Kentucky updated its reference to the IRC to December 31, 2006, which brought the Domestic Production Deduction into Kentucky tax law. The proposal is to cap this deduction at 6% of production activity income; if the change is not adopted, the deduction will rise to 9%.
Withholding on non-resident owners of Kentucky businesses
Current rules require that pass-through entities (partnerships, LLCs and S Corporations) withhold Kentucky income taxes on owners who are not Kentucky residents. The proposal will require estimated tax payments during the year; current law allows the entire amount to be paid when the entity’s return is filed.
Expedited Protest Resolution
In the past, many states including Kentucky, have instituted short-term programs, whereby those who have unresolved outstanding tax bills can avoid interest and penalties if they pay the tax in full. Governor Beshear made a similar recommendation in his budget proposal. This proposal is to waive all interest and penalties on tax assessments protested by January 19, 2010 (1) if the tax assessment has not been the subject of a final ruling and (2) if the tax liability is paid in full by June 15, 2010.
HB 530 Changes
- Extends the trade-in allowance on new car purchases to June 30, 2011
- Reduces the aggregate cap on Kentucky’s new home tax credit from $25 million to $15 million but loosens the restrictions on qualifications for the credit
- Imposes a cap on the film industry tax credit at $12.5 million (currently there is no cap); limits the amount of tax credit allowed for the Manufacturing Facilities Economic Development Program
- Removes the sun-setting provision for the waste tire fee
- Allows the Kentucky Infrastructure Authority to collect an administrative fee
- Allows the Department of Agriculture to promulgate administrative regulations to establish metrology lab operating fees (I looked it up – that’s the science of weights and measures)
- Allocates no more than two cents ($0.02) per line per month for telecommunications devices for the deaf distribution program
- Allows the Finance Cabinet to determine the best schedule to sell unclaimed securities based on market conditions and the financial status of the Commonwealth
- Alters the computation of the Environmental Stewardship Tax Credit
Comments
- There were multiple proposals to eliminate various sales tax exemptions, to impose the sales tax on services, to increase the top income tax rate from 6% to 8% and more. It looks like those proposals are dead for now, and that’s a good thing.
- Other proposals to change the corporate income apportionment formula and expand economic incentives will have to wait for another day.
- To grow jobs, businesses must grow. To encourage business expansion in Kentucky, tax policy is very important. Any changes that adversely affect business, adversely affect business growth, which adversely affects jobs for Kentucky’s citizens.
The Bottom Line
I would be interested in other people’s thoughts, but it seems to me that Kentucky’s tax policy is as simple as this – will Kentucky citizens make their own decisions on how to spend the money that they earn, or will they pay higher taxes (or higher costs because of higher taxes) and the state decides how to spend the money? Isn’t it really that simple?
What can you do?
If you have concerns about any of these or other proposals, you should contact your Representative and Senator to express your opinions and concerns.
