Big budget plus tax reform

By Bob and Julie Babbage

The 2022 legislative session was one for the Kentucky history books. Record revenues have made the budgeting process much more enjoyable, with significant investments and policy reforms expected to produce returns for generations.
Here are some important points:

Budget
House and Senate budget negotiators reached agreement on the two-year, $13 billion spending plan that includes increases to state staff, full funding of state pension systems as well as all-day kindergartens and money to beautify state parks.

The budget allocates a portion of the state’s historic surplus to bring the state’s rainy day fund total to a record $1.75 billion.

Gov. Andy Beshear and members of the Democratic minority applauded investments in shared priorities, but lamented missed opportunities in areas such as directly funding teacher and pre-kindergarten salary increases.

GOP lawmakers pointed to $537 million in new funding going directly to school districts, some of which can be used for these initiatives.

House and Senate leaders have pointed out that school superintendents are directly asking for money so they can make decisions at the local level, with many districts already pledging staff increases. A 1% increase in teacher pay statewide costs $47 million.

Tax reform
Tax reform was perhaps the most important topic of this year’s session. The House originally proposed eliminating the income tax altogether, while the Senate sought $500 rebates for individual filers and the governor argued for a 1% reduction in sales tax. .

GOP budget leaders brokered a compromise, producing a final version of Bill 8 that establishes a formula trigger for any tax rate cut.

Under the new law, state income tax will drop by half a percentage point if two conditions are met. First, state general fund revenues for that year must exceed expenditures plus the value of a 1% reduction in the income tax rate. Second, the state’s rainy day fund must equal at least 10% of certain general fund revenues at the end of a fiscal year.

If both conditions are met for fiscal year 2021, Kentucky’s flat personal income tax rate of 5% will be reduced to 4.5% effective January 1, 2023. The half-point decrease is triggered again if the same is true for the 2022 financial year, increasing to 4%, as long as the General Assembly approves the plan again.
The tax note for HB 8 predicts a decline in tax revenue of nearly $1.1 billion over the next two years. To help explain some of those losses, lawmakers left more than $1 billion unspent in the budget.

Lawmakers also moved to eliminate sales tax exemptions for a wide range of related industries and services, in hopes of increasing the general fund’s revenue pool.

HB 8 extends the 6% sales tax to the following areas: personal fitness, cosmetic surgery, athletic classes, massage, parking, ride-sharing services, auto clubs, household moving, boat launching, rental short-term housing and event rentals. Sales tax will also be added to financial services, travel agency services, social event planning, marketing, telemarketing, lobbying and website-related services.

Electric vehicle owners can also expect to see new fees. Roads have long been funded by the gas tax collected on every fill-up. Obviously, drivers of electric cars and trucks bypass this payment. Many states are now taking steps to capture turnout by increasing the use of electric vehicles.

Unemployment Insurance and Public Assistance Reforms
Leaders have consistently stressed the need for individuals to return to work, as Kentucky continues to have one of the lowest labor force participation rates in the nation.

House Bill 4 establishes a new Unemployment Insurance (UI) benefit schedule that ranges from 12 to 24 weeks, depending on the state’s average unemployment rate at the time of the individual’s claim.

In addition, Unemployment Insurance recipients must now submit proof of five job application attempts per week, up from once per week under current law.
The Legislature passed House Bill 708 in an effort to address the uncertainty and financial implications of returning to work. The bill directs the Cabinet for Health and Family Services to develop a “benefit curb” calculator for Kentuckians applying for or reapplying for public assistance benefits.

A benefit cliff occurs when a person suddenly loses their eligibility for a public assistance benefit due to a new job or a raise. HB 708 creates a legislative task force to analyze the issue and make recommendations for beneficiaries transitioning to work and new career opportunities.

House Bill 144 helps business owners freeze their employer unemployment insurance premium tax rate at 2020 levels. Employers are partly responsible for replenishing the Unemployment Insurance Trust Fund when benefits exhaust it.

Shortages, recruitment and retention of health workers
Health officials have taken significant steps to address provider shortages, recruitment and retention challenges that were prevalent even before the pandemic.
Senate Bill 10 aims to address massive nursing shortages. It restructures the state board of nursing, relaxes current limits on enrollment in nursing schools, expands instructor qualifications and speeds up licensing for nurses from other states.

House Bill 573 targets healthcare provider recruitment and retention by creating the Healthcare Worker Loan Relief Program. House and Senate budget officials set aside $2 million each fiscal year for a loan repayment program.

Signature Industry Legislation
Last year’s bill codifying historic horse racing machines into law passed the promise of reform to the pari-mutuel betting tax structure. This year’s House Bill 607 equalizes tax rates on all bets and eliminates the use of breakage on payouts from August 1.

HB 607 sets a tax rate of 1.5% on pari-mutuel wagering, in person and online. That’s a decrease of several percentage points for bets made at Kentucky tracks and across America. For bets made through the app, the tax is increased by a full percentage point. This online betting, known as Advance Deposit Betting (ADW), is the fastest growing source of revenue in the pari-mutuel tax pool.

Bill champions noted that the goal of HB 607 is to make Kentucky the most desirable horse betting state in the nation. The new rates should expand the industry and opportunities across the board.

Bourbon won major victories with House Bill 500 and Senate Bill 160. Both bills sought to protect and regulate the private cask selection process, a growing market.

House Bill 500 allows distillers to sell bottles of select products directly to customers in their gift shops. It allows distillers to have a satellite gift shop as an extension of their retail license, making it easier to sell and taste brands at fairs and festivals.

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