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Tax Reform Proposal Includes Cigarette Tax Increase, Creates Angel Investor Credit

"Kentucky deserves better and it needs better," Governor Steve Beshear said during a news conference Tuesday in which he unveiled his tax reform plan to be considered by the General Assembly.

Calling the plan, "Kentucky Competes", Beshear outlined how a reform to the state's tax code could make the Commonwealth more competitive in the 21st century.

“Kentucky’s current tax code hampers our people and our businesses, preventing us from growing the economy we need and deserve,” Gov. Beshear said. “This plan simplifies our tax code, creates an even more attractive business climate for current and future businesses, and offers some relief to every working Kentuckian.”

According to figures released through Beshear's office, full implementation of the plan would inject $210 million into the state's general fund annually.

The plan is based on the recommendations of the Governor’s Blue Ribbon Commission on Tax Reform, led by Lt. Governor Jerry Abramson. The Commission spent months holding town hall meetings in each of the state’s six congressional districts to gather information from all interested Kentuckians. 

“If Kentucky wants to be competitive in the 21st century and offer employees an educated, productive and skilled workforce, we must enhance our ability to attract and retain jobs by modernizing our tax system,”Abramson said. “The Governor’s ‘Kentucky Competes’ tax reform plan does just that by making specific recommendations on how to update the Commonwealth’s antiquated tax system and make us more competitive at all levels.”

Beshear said Tuesday that his plan creates a tax code that competes for quality jobs, helps Kentucky's signature industries thrive and expand, creates a healthier workforce, modernizes the tax code to acknowledge changes in technology, as well as differences with other states.

The plan reduces individual income tax rates. "When coupled with existing Family Sized Tax Credit, the proposed Earned Income Tax Credit, and the new Hold Harmless credit, every working Kentuckian will benefit from this rate change proposal," Beshear said in a news release.

The plan also enacts a refundable Earned Income Tax Credit (EITC) at 7.5% of the federal credit. It also lowers the top corporation income tax rate from six to 5.9%, phases in "single factor" apportionment solely on sales for corporate income tax, creates an angel investor tax credit (an item pushed for by State Rep Arnold Simpson of Covington and supported by Northern Kentucky business leaders and local governments such as the Covington City Commission which passed a resolution in support of it at its last meeting), expands the state's Research and Development tax credit to human capital, doubles the New Market Tax Credit, exempts inventory from state property tax, and eliminates selected negligible state property tax rates for tangible personal property.

The president of the Kentucky Chamber of Commerce applauded the plan's proposals for business.

"We commend Gov. Steve Beshear for providing a strong starting point for discussions of tax reform," David Adkisson said in a statement. "We're pleased that the governor is emphasizing competitiveness. The Chamber's top priority is making Kentucky competitive so our industries, large and small, can create more jobs." 

"The governor's proposal strikes a responsible balance between competitiveness and the need to fund government.  We will now review the specifics with our member companies. Going forward, the Chamber commits to being a constructive part of the tax reform process."

Signature industries addressed

Beshear also claimed that his tax reform plan would boost the state's signature industries of bourbon and horses.

The plan calls for the creation of an income tax credit for the bourbon industry, an exemption on sales and use tax on certain equine products (similar to other livestock), an exemption on sales tax for pharmaceuticals for food animals, and lowers the wholesale tax on beer, wine, and distilled spirits. The plan also repeals the distilled spirits case sales tax.

Meanwhile, the proposal increases the tax on cigarettes to $1, increases the tax rate on other tobacco products commensurate with cigarette rate increase, creates a tax on e-cigarettes at twenty percent of the value, and restores a tax on cigarette rolling papers.

Modernized code would acknowledge changing demographics, technology

Beshear said that his plan broadens the sales tax to include selected services. "Kentucky long ago moved from a goods-based economy to a services-based economy, but the tax code has not adapted to this transition," Beshear said. His proposal expands the sales tax to the labor associated with the installation and repair of taxable goods, certain recreational activities, and certain commercial, residential, and personal services.

The plan clarifies that the sales tax is applicable to all pre-written software, regardless of its delivery method. "This addresses new challenges for the sales tax created by sales on the digital cloud," Beshear said.

The sales tax and transient room tax would apply to an entire hotel accommodation price, Beshear said. "This modernization proposal clarifies that all amounts paid for staying in a Kentucky hotel or similar accommodation, including amounts charged or retained by online travel companies, are included in the tax base for the sales tax and state and local transient room taxes," Beshear said.

There would also be changes to retirement income taxes. The plan reduces retirement income exclusion for taxpayers with a federal adjusted gross income (AGI) of more than $80,000 and phases it out for AGI of more than $100,000. "This proposal still keeps Kentucky's tax code among the friendliest for retirees," Beshear said. Social Security benefits are currently not taxable in Kentucky and would not become so under Beshear's plan, according to a news release.

The plan also phases out the $10 Individual Income Tax Credit and requires married couples to file the same income tax status at the state level as they do at the federal level.

The Governor also reiterated his support for a Constitutional amendment that would allow local communities to vote on a local sales tax for specific projects they may need. That issue will be addressed in separate legislation, but the Governor said it is critical to communities’ success.

Governor to seek consensus before any vote

The legislative proposal will be introduced by Rep. Rick Rand, the chair of the Appropriations and Revenue committee, so discussion can begin quickly.  “I will ask the House budget committee to hold hearings on this proposal soon to receive input from the public,” Beshear said.  

“However, I am well aware that a proposal to amend our tax code is a politically sensitive matter, especially during an election year.  I am also aware of the potential of turning what needs to be a serious discussion regarding tax reform into a political football to be used by our political parties in the upcoming elections. I am determined to avoid that possibility,” he said.  “Therefore, I will not ask either chamber to vote on the bill or any version thereof unless a consensus has been reached on a proposal by a majority of both Houses which will assure its passage.”


The Governor explained that this process of building consensus between both chambers has proven successful before – particularly in last session’s effort to resolve the state’s unfunded public pension liability.  That bill was debated and approved during a short (30-day) session, so the Governor said there was plenty of time to reach a consensus.  He added that building agreement before any vote will be “the only approach which offers any opportunity for success” in passing tax reform.

Read the KY Competes Plan: