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State Spending, Revenue Bills Head to Gov. Bevin's Desk

In a day marked by large demonstrations by educators from across Kentucky, the General Assembly passed its revenue and tax bills and sent both to the desk of Governor Matt Bevin for his signature.

But it wasn't just teachers who were angry at some of the budgetary proposals. The conservative group Americans For Prosperity sent a statement out decrying some of the proposals, as did Bevin himself.

The revenue measure would generate nearly a half of billion dollars in additional money for the state over the next two fiscal years.

It would do that by creating a flat rate for personal and corporate income taxes in Kentucky while expanding the sales tax, said Senate Appropriations and Revenue Committee Chairman Christ McDaniel (R-Taylor Mill). Known as House Bill 366, it passed the House on a 51-44 vote and Senate on a 20-18 vote.

McDaniel said the personal income tax rate would be set at a flat 5 percent instead of the current brackets ranging from two percent to six percent.

Senate Majority Floor Leader Damon Thayer (R-Georgetown) said lowering the high end of the current personal income tax rate to five percent would put more than $500 million back into people’s pockets per year. It would also make Kentucky the 10th lowest state in personal income tax in the nation, he added.

“This will increase the competitiveness of this state when it comes to attracting jobs following up on the pro-business bills we passed last year that have resulted in the announcement of over 17,000 new jobs and $9 billion of economic impact to this commonwealth,” Thayer said.

McDaniel said the only itemized deductions allowed under HB 366 would be for Social Security income, mortgage income and charitable giving. It would disallow the deductions for such things as medical costs, taxes paid, interest expense on investments, and casualty and theft losses. It would also remove the $10 state personal income tax credit.

Another provision would lower the pension income exclusion to $31,110 from $41,110.

McDaniel said Kentucky’s corporate income tax would also go to a flat rate of five percent instead of the current brackets ranging from four percent to six percent. The inventory tax would also be phased out over a four-year period.

This brought criticism from legislators such as Senate Minority Floor Leader Ray S. Jones II (D-Pikeville).

“This tax plan is a regressive tax plan that is not in the best interest of working Kentuckians,” he said. “Lowering of the corporate tax rate is a giveaway. It is not going to stimulate any investment in Kentucky. It is not fair that this bill shifts the burden to working families and people on a fixed income to cut corporate taxes. That is essentially what it does.”

In the House, Rep. Dennis Keense (D-Wilder) blasted the move. "We asked the majority to delay one day for time to review the tax plan and were denied," Keene said on Twitter. "The fiscal impact is unknown other than Kentuckians saw a major tax increase today in sales tax and personal income taxes on retirees, low and middle income citizens."

Rep. Chris Harris (D-Forest Hills) also stood in opposition to HB 366. 

“I’ve heard on this floor many times this session, ‘I like to deal in facts,’” he said. “…Well, the fact is, this bill raises revenue and instead of securing the pensions for our teachers like we ought to be doing, we’re giving corporations a tax break.”

McDaniel said that Kentucky would broaden its tax base by putting a sales tax on certain services labor and services associated with certain repair, installation and maintenance related to personal property, such as a car.

He said the sales tax would also be expanded to other selected services including landscaping services, janitorial services, veterinarian services for small animals, fitness and recreational sports centers, commercial laundries, golf courses and country clubs, dry cleaning, pet grooming, weight loss centers and campgrounds. It would not include barbers and cosmetologists.

The cigarette tax would also be raised 50 cents to $1.10 per pack, under HB 366.

Senate President Robert Stivers II (R-Manchester) said the revenue measure would allow the General Assembly to pass a structurally balanced budget for the first time in two decades while providing vital government functions such education.

House Appropriations and Revenue Chair Steven Rudy (R-Paducah) said HB 366 would modernize Kentucky’s tax structure to both improve personal income and fuel job growth.

“Today is our day to declare that Kentucky is ready to move forward with comprehensive tax reform,” he said. “Today we boldly declare that being at the bottom of the barrel is not good enough, and that the people of Kentucky deserve better. Today is the day that this body will declare that having an average household income 18 percent below the national average is not good enough.”

SB 366 now goes to the governor.

So does House Bill 200, a $22 billion state spending plan that would restore some funding cuts proposed by the governor while ensuring that Kentucky fully funds its public pension systems has received final passage in the House after being approved by the Senate earlier today.

House Bill 200 was given final approval on a House vote of 59-36. The Senate approved the bill on a vote of 25-13.

Pension funding is where most of the new spending in HB 200 would go, with billions of dollars slated to fully fund Kentucky’s public employee and teacher retirement plans over the next two years. Additional dollars in the legislation include $59.5 million next fiscal year to cover health insurance for some retired teachers who are not yet Medicare eligible, among other provisions.

While the budget still includes 6.25 percent baseline cuts for most state agencies as recommended by the governor, a few agencies—including the Department of Veterans’ Affairs, Kentucky State Police, and local school-based Kentucky Family Resource and Youth Services Centers, or FRYSCs—will have their funding restored. The FRYSCs alone will receive an additional $4.1 million in state dollars this fiscal year and $9.7 million in each of the next two fiscal years to restore their proposed cuts.

For K-12 education, HB 200 would boost base per-pupil funding for K-12 education, or SEEK, to a record level of $4,000 per student in each fiscal year. It would also increase school transportation funding to $127.8 million in each year of the budget cycle to help meet the pupil transportation needs of Kentucky’s school districts. And it would add over $10 million next fiscal year to help 31 school districts replace lost revenues following a drop in the assessment on unmined coal, among other provisions.

For postsecondary education, HB 200 in its final form includes more than $227 million for need-based scholarships and grants. It also adds $62 million over the biennium in state funds for the Postsecondary Education Performance Fund which is designed to modernize how the state funds its public colleges and universities, as well as provide millions of dollars in funding for other higher education needs.

HB 200 also includes more than $60 million in new revenue to help implement proposed adoption and foster care reforms including more than $23 million for placement of foster children with relatives, tens of millions of dollars to hire more social workers and increase social worker salaries, and at least $5 million for kinship care.

Additional funds for public safety are also found in the bill, which would appropriate over $85 million in federal funds to support victims of crime programs. Yet other provisions would add $10 million to hire 94 additional Youth Workers for the Department of Juvenile Justice and around $6 million to hire more prosecutors, along with additional funding in other areas.

Public libraries would also get a boost in the bill, which would add over $8.5 million in state funds in direct local aid for the institutions.  And KentuckyWired – the state’s open-access broadband network now under construction through a public/private partnership – would receive no state General Fund appropriations but would receive over $70 million in non-governmental expense (NGE) spending authority over the biennium to continue work that project.

McDaniel said HB 200 would provide a structurally balanced budget for the first time in more than two decades. He did, however, admit that its passage is a “hard process.”

“I have no doubt that 123 years ago it was designed to be a hard process,” McDaniel said. “But ultimately we have to come together and do what’s best for the commonwealth and for 4.3 million people who count on us to ensure the appropriate functions of their government continue.”

Senator Jones of Pikeville stood to speak against HB 200. He said he was concerned about reductions in higher education funding and the lack money for safety measures in secondary schools. “It is still a bad budget that does not fund education as it should be,” he said. “It does not meet the needs of the state.”

Also speaking in opposition to the bill in the House was Rep. Jim Wayne (D-Louisville) who said the 6.25 percent cuts to most agencies that remain in HB 200 combined with certain other provisions in the bill will “continue to hurt Kentucky.”

“We can do better than this,” Wayne said. “Collectively, we have to agree that we’re on a mission to invest in this great Commonwealth, not disinvest.”

Kentucky prohibits its state budget revenue from being included in its spending bills, so the revenue for the next two-year state budget is approved separately by state lawmakers. The funding required to carry out the appropriations in HB 200 is found in HB 366, which also received final passage in the House today. That bill passed on a final vote of 51-44 after clearing the Senate on a vote of 20-18.

HB 200 now goes to the governor to be signed into law. If the governor vetoes the bill, the General Assembly can override that veto when it returns to Frankfort to conclude the session in mid-April after a brief veto recess. That recess is scheduled to begin Tuesday.

Also given final passage today was the state Legislative Branch budget in HB 204 and the Judicial Branch budget in HB 203. HB 204, which fully funds the pensions of legislative staff but does not fund the Legislators Retirement Plan, received final passage on a House vote of 86-8. HB 203 received final passage on a House vote of 81-9. The two bills had passed the Senate on votes of 36-2 and 26-12 respectively last month.

-Legislative Research Commission with additional reporting by RCN staff

Photo: Gov. Matt Bevin