Kentucky Approves Slight Tax Changes

April 16, 2014

Gov. Steve Beshear's problematic tax overhaul seems to have fizzled out, with the Legislature enacting a revenue bill with just a few small tax changes. The final plan that became law, HB 445, had many small components leading to only very slight tax changes in the aggregate. The plan:

  • increases the motor fuels wholesale tax by approximately 1.5 cents in order to finance roads
  • provides a tax credit to the bourbon industry to offset local per-barrel property taxes
  • eliminates the sunset date for the film tax credit
  • updates the reference date for the Internal Revenue Code from 2006 to 2013
  • establishes a pari-mutuel tax on some horse racing
  • extends sunset date of the “waste tire fee” to 2016
  • lowers the wine and beer wholesaler tax from 11 percent to 10 percent over 4 years
  • creates an angel investor tax credit
  • expands the New Markets tax credit providing incentives to rural investment

Some of these changes are reasonable. Updating the reference date for the revenue code was long overdue (Kentucky’s previous reference date was 2006). Raising the motor fuels tax (technically raising the “price floor” for computing the wholesale rate; effectively a tax increase) is also a reasonable proposal given how little of Kentucky’s infrastructure is currently user-funded. Lowering the wine and beer tax is also valuable given that Kentucky currently has the highest wine tax in the nation and the 6th highest beer tax.

However, there are problems in the plan too. It makes the state’s relatively small film tax credit permanent, which, as we have written many times, incurs a real cost for little to no benefit. The new credit for angel investors, and the expansion of the New Markets credit, are also unnecessary complications of the tax code, affording little meaningful benefit for Kentuckians while creating tax carve-outs for select groups.

Finally, the bourbon barrel tax credit is a curious case. The per-barrel property tax on bourbon is essentially a kind of special inventory tax for bourbon distilleries, burdening one of Kentucky’s signature industries with an economically disadvantageous tax. Repeal of the tax, and all of Kentucky’s inventory taxes, would be a step in the right direction, as I noted earlier this year. In lieu of repeal (which would cut funding to localities), Kentucky policymakers have created an income tax credit to offset taxes on bourbon. While this policy correctly identifies barrel taxes as a problem, and provides some relief for taxpayers, it effectively subsidizes municipal taxes, and could actually incentivize higher barrel taxes. Real relief from this tax, and other Kentucky state and local taxes, will come with structure reform or repeal, not an income tax credit that simply shifts the burden of payment from the distillers to the whole state tax base.

Read more on Kentucky here.

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