FRANKFORT -- After only five working days -- the shortest special session in memory to pass substantive legislation -- the Legislature today approved tax relief for 70,000 small businesses in Kentucky, while also approving tax incentives to help lure a state-of-the-art clean-coal demonstration project to the state.
House Bill 1 will provide immediate tax relief for lower-profit small businesses by excluding them from the controversial alternative minimum tax calculation (AMC) on gross receipts or gross profits if those total $3 million or less for the tax year. The AMC will be phased out for small businesses with gross receipts or gross profits between $3 million and $6 million. All businesses will still pay a $175 minimum tax.
The bill passed both the House and the Senate without a single 'nay' vote and without amendment -- the House Monday and the Senate today. Because of the requirement that every bill get three '"readings" in each chamber before being voted on, five days is the shortest period in which any legislation can normally pass both chambers and become law.
The session's quick action reflects the fact that lawmakers from both chambers discussed and reached consensus on the contents of the tax changes contained in the bill prior to the governor calling them into special session.
The changes were felt necessary because of a flaw with the tax modernization plan passed by the Legislature in 2005, which had the unintended consequence of substantially boosting taxes on many small businesses in the state.
Under the tax structure created in 2005, businesses must pay the greatest amount of corporate tax produced by one of three calculations: the AMC, the traditional corporate income tax, or the $175 minimum.
Some businesses with a high sales volume but a low profit margin -- and even some businesses that post no net profits at all -- have paid significantly more tax under the AMC, which was meant to target out-of-state companies that were avoiding tax liability in Kentucky. But an additional effect was that thousands of Kentucky businesses were socked with enormous unexpected tax bills.
Under HB 1, these financially strapped businesses will get immediate relief.
The AMC itself for larger-income businesses would be replaced with a new minimum calculation called a Limited Liability Entity Tax that would replace but be paid at the same rate as the current AMC. Part of the LLET would be an $175 annual tax that would replace the current $175 minimum tax and be paid by all corporations and limited liability entities that are not exempt.
Lower-income businesses are not the only entities that would receive an LLET exemption. Eighteen different types of entities, including political organizations, charities and agricultural cooperatives, would be exempt from the LLET and the $175 annual tax.
Shareholder corporations and owners of pass-through entities would be able to credit any LLET tax paid toward their corporate income tax and, for owners of pass-throughs, against individual income tax under the bill.
HB 1 would also cut the top state corporate income tax rate from 7 percent to 6 percent at the start of the new tax year.
The second issue taken up by the special session was tax incentives to help lure FutureGen, a demonstration and research facility focused on clean-coal, zero-emissions power, to Kentucky. The federal Department of Energy is leading a consortium that will build the $1 billion facility. FutureGen will produce hydrogen and electricity from coal while capturing carbon dioxide and containing it underground instead of releasing it into the atmosphere.
Seven states have submitted 12 bids for the project, with between three and five finalists expected to be named in July. If Kentucky is one of the finalists, several site tests will be conducted to compare our proposal to the others. The winning bid should be announced late next year.
House Bill 1 includes sales-and-use tax incentives on building materials that could total $90 million if FutureGen is constructed in Kentucky. It is estimated FutureGen will generate 1,300 jobs during its construction phase, and between 125 and 150 high-paying professional jobs after that. It is also hoped that the project could lead to energy-technology spinoffs similar to the beneficial ripple effect the Toyota plant in Georgetown has had on the Kentucky economy.
