Small Tax Breaks’ Costs Add Up Over Time

9/8/2017 – Kentucky Center for Economic Policy (reprinted)

By Pam Thomas

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Cleaning up expensive tax breaks is essential if we are going to invest in a stronger Kentucky and restore funding to our pension systems. The biennial Tax Expenditure Analysis (i.e. tax break analysis) published by the Office of State Budget Director provides insight into how much we are spending and on what. According to that analysis, our current tax code provides more exemptions than it collects in revenues.  There are so many that the document is 154 pages in length and lists 269 separate tax breaks valued at over $13 billion in the current fiscal year.

How did we get here?

In addition to the many big tax breaks that cost Kentucky hundreds of millions in revenue every year and  continue to grow because they are never revisited or reviewed, nearly every session the legislature also enacts or expands seemingly small tax breaks, often to benefit powerful interests.

These smaller tax breaks are often sold as a way to help businesses or grow the economy (a dubious claim itself) at little to no cost to the Commonwealth since in many cases the projected loss of revenues is “just a few million dollars a year.” The problem is that when new “small” breaks are enacted year after year and existing breaks are expanded or extended session after session they add up, resulting in a tax code that is fragmented, convoluted, unfair, inefficient, and, most importantly, unable to generate sufficient revenues to support the investments necessary for Kentucky to prosper.

The list below illustrates how small tax breaks can add up over time. It’s a partial compilation of tax breaks enacted or expanded since 2009 by legislative session (note that the impacts reflected below are those determined at the time the legislation was enacted, compiled by KCEP from information available on the LRC website unless otherwise referenced):

 

2017

• Expand aviation fuel tax credit for Amazon: –$3 million (Proceeds from tax on aviation fuel are deposited in the Kentucky Aviation Economic Development Fund, not the state General Fund)
• Expand Tax Increment Financing Provisions to include projects that did not meet the existing requirements: – Indeterminable negative (this designation is used by the Legislative Research Commission when information is not available to provide an estimated dollar amount)

 

2016

• Expand the Kentucky Industrial Revitalization Act (KIRA) incentives for supplemental projects: -$1.1 million
• Exempt blast furnace purchases related to KIRA projects from the sales tax: -$1 million

Both items listed here were identified in the LRC fiscal note as being for AK Steel

 

2015

• Exempt Breeder’s Cup wagers from pari-mutuel tax: -$800,000
• Extend the UPS Metropolitan College tax credit for 10 more years: -$4 million (estimate based on history of credits claimed under the program – primary beneficiary is UPS)
• Expand film industry incentive credit and reduce threshold to qualify: -$5.5 million

 

2014

• Establish the Angel Investor Tax Credit: -$3 million (estimate based on the program cap)
• Expand the Historic Preservation Tax Credit: -$6 million (narrowly tailored for specific projects – estimate based on the investment and maximum recovery permitted)
• Establish the Distilled Spirits Income Tax Credit: -$2.8 million (for 1st year of a 5 year full phase in when the impact is expected to be $13 million annually)
• Increase the annual cap for the New Markets Development Program -$5 million (based on the cap increase)
• Phased reduction of the tax imposed against wine and beer from 11 percent to 10 percent over 5 years: -$1.6 million (for the 1st year of a full 5 year phase in when the impact is expected to be -$7 million annually)
• Extend the Film Industry Tax Credit: – $1 million

For a more detailed description of the 2014 tax breaks listed above see this analysis.

• Expand the cap on the Endow Kentucky tax credit program to $1 million: -$500,000 (estimate based on the amount of the cap expansion)
• Expand the Kentucky Jobs Retention Act (KJRA) to apply to companies engaged in the manufacture of household appliances or appliance parts or supplies: –$15 million in out years
• Expand the Kentucky Industrial Revitalization Act program to allow supplemental projects by existing program beneficiaries: Indeterminable negative

 

2013

• Establish a trade in-allowance against the purchase of new motor vehicles: –$34 million

 

2012

• Expand economic development incentives for automaker and auto supply parts manufacturers: -$18 million in out years
• Expand incentives available under the Kentucky Industrial Revitalization Act (KIRA) to apply to supplemental projects undertaken by program participants: Indeterminable negative

 

2010 (Includes extraordinary and regular sessions)

• Establish Endow Kentucky Tax Credit: -$500,000 (based on program cap)
• Accelerate application of the Small Business Incentive Credit: -$2.9 million (see original listing in 2009)
• Establish New Markets Tax Credit: -$10 million (based on program cap)
• Extend temporary new car trade in allowance (made permanent in 2013): -$4.8 million (based on historical information)
• Expand credits under the Incentives for Energy Independence program: Indeterminable negative
• Extend KREDA incentive program: -$1.1 million
• Exempt Breeder’s cup pari-mutuel tax (limited to two years): Minimal negative

 

2009 (Extraordinary session)

• Expand incentives for reinvestment in existing manufacturing companies: -$30.2 million
• Establish Combined Economic Development Programs: -$1.5 million
• Establish Metropolitan College Credit: -$4.4 million
• Expand the Historic Preservation Tax Credit Cap (from $3 million to $5 million): -$2 million
• Establish Railroad Improvement Credits: -$3.4 million
• Establish Sales Tax Rebate for Rural Convention Centers: -$2.4 million
• Establish Small Business Incentive Credits: -$3.3 million
• Establish Breeder’s Cup Tax Exemption: -$0.9 million
• Establish Film Industry Credits: -$13.4 million
• Establish Kentucky Investment Act: -$4.4 million
• Establish New home credit (time limited to 2 years): -$25 million over 2 years (based on program cap)
• Enact temporary new car trade in allowance (one year only): -$25 million (based on program cap)
• Exempt Military Pay from the Income Tax: –$18.6 million

Viewed in this way, it is easier to understand how and why our tax code has become what it is – it didn’t all happen at once, nor does it represent a comprehensive and cohesive system for producing the revenue we need to invest systematically in education, workforce development, infrastructure, health, and other essential public services to support thriving communities.  After many years of incremental changes, tinkering around the edges, and passage of new special interest tax breaks session after session, it is time for a comprehensive and honest review of our state and local revenue systems.