On April 13, 2018, the Kentucky Legislature overrode Governor Matt Bevin’s veto to pass H.B. 366, a tax reform package. Immediately after the passage of H.B. 366, the legislature focused its attention on H.B. 487, referred to as the “revenue cleanup bill,” where several changes and minor drafting corrections were made to the original tax reform bill. H.B. 487 was passed by the legislature on April 14 and has been sent to Governor Bevin for signature. The Governor has 10 days from April 14 to either sign H.B. 487 into law or veto the bill. If the Governor vetoes the bill or any part thereof, H.B. 366 would stand as is, and the changes addressed in H.B. 487 would not become law.
The following is a list of key items that H.B. 366 changes in Kentucky’s tax code. There are some provisions in H.B. 366 that would be amended if H.B. 487 is signed into law. These changes are noted beside the specific provision. If H.B. 487 becomes law, CSH will provide a more detailed summary of those changes.
Effective beginning for tax years on or after January 1, 2018:
- Replaces the current six-bracket individual income tax, which has a top rate of 6%, with a 5% single rate.
- Replaces the current three-bracket corporate income tax, with its top rate of 6%, with a flat 5% rate.
- Broadens the starting income tax base by removing most deductions and repealing the personal exemption credit ($10 per filer; $20 per dependent).
- Reduces the amount of pension income that is excludable from income tax from $41,110 to $31,110.
- Phases out the inventory tax using a tax credit.
- Adopts a single sales factor apportionment and conforms to the IRS code as of December 31, 2017.
Effective for transactions on or after July 1, 2018:
- Includes several new services in the sales tax base, such as bowling centers, dry cleaning and laundry services, diet and weight reducing centers, extended warranties, fitness and recreational sports centers, golf courses and country clubs, industrial and laundry services, janitorial services, labor services, landscaping services, limousine services, linen supply services, other personal care services, overnight trailer campgrounds, pet care veterinarian services, pet grooming and boarding services, and pollution control facilities. (Note: if H.B. 487 is signed into law, then installation and repair services related to manufacturing equipment would be exempt).
- Increases the tire fee to $2 for each new motor vehicle tire sold in-state and subjects this fee to Kentucky sales tax, effective July 1, 2018.
- Increases the cigarette tax from 60 cents to $1.10 per package.
Furthermore, H.B. 366 suspends many credits and incentives that are currently allowed. The following credits and incentives are suspended until July 1, 2022:
- Kentucky Industrial Revitalization Act (KIRA). (Note: if H.B. 487 is signed into law, the KIRA credit would be retained).
- Kentucky Investment Fund Act (KIFA). (Note: if H.B. 487 is signed into law, the KIFA credit would only be suspended for two years and would be capped at $3 million annually beginning January 1, 2021. The $3 million cap would remain in place indefinitely.).
- Kentucky Angel Investment Act (KAIA). (Note: if H.B. 487 is signed into law, the KAIA credit would only be suspended for two years and would be capped at $3 million annually beginning January 1, 2021. The $3 million cap would remain in place indefinitely).
- Kentucky Refundable Motion Picture Sales Tax Credit.
CSH is continuing to monitor these developments.