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COMMONWEALTH OF KENTUCKY
STATE FISCAL NOTE STATEMENT
GENERAL ASSEMBLY LEGISLATIVE RESEARCH COMMISSION
2010 REGULAR SESSION
MEASURE
( x) 2010 BR No. 2 ( x) HB Bill No. 13
( ) Resolution No. ( ) Amendment No.
SUBJECT/TITLE AN ACT relating to taxation and declaring an emergency.
SPONSOR Representative Jim Wayne
NOTE SUMMARY
Fiscal Analysis: x Impact No Impact Indeterminable Impact
Level(s) of Impact: x State Local Federal
Budget Unit(s) Impact Revenues
Fund(s) Impact: x General Road Federal
Restricted Agency (Type) (Other)
FISCAL SUMMARY
_______________________________________________________________________________
Future Annual
Fiscal Estimates 2009-2010 2010-2011 2011-2012 Rate of Change
Revenues (+/-) $87.7 million $256.6 million $295.5 million $295.5 million
Expenditures (+/-)
Net Effect $87.7 million $256.6 million $295.5 million $295.5 million
______________________________________________________________________________
MEASURE'S PURPOSE:
The proposed legislation would:
Increase individual income tax rates for higher incomes by taxing income between $75,000 and $90,000 at
7%, and by taxing income over $90,000 at 8%.
Allow a refundable Kentucky earned income tax credit in an amount equal to 15% of the federal earned
income tax credit.
Reinstate the Kentucky estate tax by „decoupling‟ from the federal estate tax for deaths occurring on or
after August 1, 2010.
Impose the sales tax on a number of services, and remove the sales tax exemption for certain pollution
control equipment, if installation of the equipment is required by the federal government.
PROVISION/MECHANICS:
The individual income tax rate for taxable income over $75,000 is increased. The current tax rate is 6% for taxable
income over $75,000. That rate is increased to 7% for taxable income between $75,000 and $90,000, and to 8% for
taxable income over $90,000. The tax rates for income below $75,000 are not changed in the proposed legislation.
The proposed legislation implements an earned income tax credit that mirrors the federal earned income tax credit.
The proposed credit would, like the federal credit, be refundable, which means that a taxpayer whose Kentucky
2010 BR0002-HB13
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earned income credit exceeds their tax liability could receive the balance of the credit in the form of a refund.
Requirements to qualify for the credit are identical to the federal requirements, so a Kentucky taxpayer who
qualifies for the federal credit automatically qualifies for the Kentucky credit. The credit is equal to 15% of the
federal credit. Note that this credit is provided in addition to the low income credit already included in Kentucky
law.
The bill changes the Kentucky estate tax law to reference the federal law in effect on January 1, 2003, and limits the
unified credit that may be used to reduce the taxable estate to the amount of credit allowed on January 2, 2001, or
$675,000. By making this change, Kentucky will not recognize the phase-out of the federal credit that was allowed
against federal estate tax prior to 2006. Federal law allowed a credit for tax paid to states for any state-level estate
tax. This credit essentially allowed part of the calculated federal estate tax to be paid to states, and was usually
referred to as the „pick-up‟ tax. An estate would pay the same amount of tax, but a portion of it was paid to the
state. Federal estate law changes resulted in a phase-out of the „pick-up‟ tax that was paid to the states. In
Kentucky, the amount of the estate tax was equal to the allowed federal „pick-up‟ credit. So when the „pick-up‟
credit was phased out, Kentucky‟s estate tax also phased out. The change proposed in 2010 BR 2 would reinstate
Kentucky‟s estate tax to the amount that would have been due if the federal phase out had not occurred.
In addition to the change in the „pick-up‟ tax, the proposed legislation limits the amount of the allowed unified
credit, which reduces the amount of the taxable estate, to the amount of unified credit allowed on January 2, 2001, or
$675,000. The federally allowed unified credit has increased to $3,500,000 for estates resulting from deaths in
2009.
For sales tax purposes, the proposed legislation expands the sales tax base to include:
Golf course greens fees and membership fees in private golf clubs and private country clubs
Janitorial services, including carpet, upholstery, and window cleaning
Garment alteration and garment repair services
Non-coin operated laundry and dry-cleaning services
Armored car services
Security services
Exterminating and pest-control services
Chartered air flight services if a pilot is furnished, including hot air balloon flights
Landscaping services, excluding lawn-care services
Non-coin operated automotive washing services and waxing services
Commercial linen services, excluding uniform services and linen services to hospitals and nursing homes
Limousine services if a driver is included.
In addition to the expanded sales tax base, the purchase of some pollution control equipment that is required by the
federal government is no longer exempted from the sales tax.
FISCAL EXPLANATION:
Individual Income Tax. Increasing income tax rates for tax years beginning on or after January 1, 2010 as proposed
in 2010 BR 2 would result in an estimated $84.5 million of additional revenue in FY 2010, $227.3 million in FY
2011, and $234.3 million in FY 2012. Employers should increase amounts withheld from employees effective for
wages paid on and after January 1, 2010, and individuals who make declaration payments would be expected to
increase their payments effective for the April 2010 payment.
Implementation of a Kentucky earned income tax credit would result in reductions in Kentucky income tax revenues
of approximately $18.3 million in FY 2010, $93.1 million in FY 2011, and $97.2 million in FY 2012.
Sales and Use Tax. The inclusion of selected services in the sales and use tax base is expected to increase sales tax
revenues by $100.1 million in FY 2011 and $113.2 million in FY 2012. Additionally, the removal of the exemption
for federally required pollution control equipment is expected to increase sales tax revenues by $21.5 million in FY
2010, $22.3 million in FY 2011, and $23.0 million in FY 2012.
Estate Tax. De-coupling from the federal estate tax is expected to result in increased revenues from estate tax in the
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amount of $22.2 million in FY 2012. No estate tax is expected to be received before FY 2012 because of the
method and timing of filing estate tax returns. Existing federal law that resulted in the phase-out of the Kentucky
estate tax will sunset effective January 1, 2011. This will result in the “reinstatement” of the Kentucky estate tax for
dates of death on or after January 1, 2011, assuming the phase out is allowed to sunset. Accordingly, the proposed
change in estate tax contained in BR 2 will be for dates of death from August 1, 2010 through December 31, 2010
only.
Total Impact. The combined impact of these various effects would increase revenues by $87.7 million in FY 2010,
$256.6 million in FY 2011, and $295.5 million in FY 2012.
Table 1: Fiscal Impact by Fiscal Year
Fiscal Year FY 2010 FY 2011 FY 2012
Income Tax bracket changes $84.5 $227.3 $234.3
Earned Income Tax Credit (18.3) (93.1) (97.2)
Estate Tax de-coupling 0.0 0.0 22.2
Sales Tax on selected services 0.0 100.1 113.2
Sales Tax pollution control equipment 21.5 22.3 23.0
TOTALS $87.7 $256.6 $295.5
DATA SOURCE(S) Office of the State Budget Director, Dept. of Revenue, IRS, LRC Staff
NOTE NO. 111 PREPARER John Scott REVIEW LBH DATE 3/3/10
LRC 2010-BR0002-HB13
