The Task Force on Tax Expenditures, a bipartisan group of legislators charged with examining the commonwealth’s tax expenditures, released its report on December 13. Kentucky statute defines a “tax expenditure” as the estimated amount of revenue loss resulting from an exemption, exclusion, or deduction from the base of a tax, a credit against the tax, a deferral of a tax, or a preferential tax rate. The group’s 38-page report mainly consists of the minutes of each of its four meetings, along with six recommendations.
The first recommendation to sunset expenditures outside of the top ten is the most significant and most controversial. Six of the top ten tax expenditures are for sales and use tax. They are:
The remaining four tax expenditures from the list are:
That means several popular expenditures would be subject to a sunset, including the charitable contribution deduction, mortgage interest deduction, and pension income exclusion. As a result, it’s doubtful the legislature would adopt that recommendation in its entirety, although it will likely spur discussions to take a closer look at expenditures on a regular basis, particularly if the legislature establishes an oversight board.
- Sunset all tax expenditures on June 30, 2020, except for the top ten expenditures by dollar value
- Establish a legislative Tax Expenditures Oversight Board
- Include more specific information in the budget office's Tax Expenditure Analysis report
- Improve data collection by the Dept. of Revenue while maintaining taxpayer confidentiality
- Codify requirement that each budget bill contains a summary of the tax expenditure analysis
- Require newly proposed tax expenditures to have an initial sunset clause of five years
The first recommendation to sunset expenditures outside of the top ten is the most significant and most controversial. Six of the top ten tax expenditures are for sales and use tax. They are:
- Prescription drugs, prosthetic devices, and physical aids;
- Food and food ingredients;
- Charitable, religious, and educational organizations;
- Residential utilities;
- State, cities, counties, and special taxing districts; and
- Various agricultural items, including livestock, feed, seeds and fertilizers.
The remaining four tax expenditures from the list are:
- The standard deduction (individual income tax);
- Social security benefits (individual income tax);
- The annual tax rate ceiling (real property tax); and
- The exclusion of dividend income (corporation income tax).
That means several popular expenditures would be subject to a sunset, including the charitable contribution deduction, mortgage interest deduction, and pension income exclusion. As a result, it’s doubtful the legislature would adopt that recommendation in its entirety, although it will likely spur discussions to take a closer look at expenditures on a regular basis, particularly if the legislature establishes an oversight board.