Implications of House Bill 440 - Case Study Example

House Bill 440 was approved on the final day of the General Assembly as part of a compromise bill to reform the s ailing pension system. This bill is now a Kentucky State Law. It is believed that “HB 440 offers a financing component to the plan. SB 2 will require the state to contribute the full amount recommended by actuaries to the pension system each year beginning in fiscal year 2015. Rather than a defined-benefit plan, the legislation offers future public workers a hybrid cash balance plan with a guaranteed four percent return on contributions. On the funding side of the issue, HB 440 will generate almost $100 million a year from tax changes that include a $10 reduction in the personal income tax credit, a trade-in credit for new cars, a cap on vendor compensation for sales tax collection, and enhanced collection efforts by the state Department of Revenue.” (Kentucky Legislature) What is House Bill 440? The amended bill refers to the authority of the ‘Department of Revenue (DOR)’ to extend, revoke or grant ‘professional license, driver license and motor vehicle registration’ for ‘delinquent taxpayers’ (Wooden). The Bill further states that all individuals or businesses that have accrued taxes may have their licenses revoked with immediate effect. For this reason, the DOR has directed the relevant authorities to provide information to the DOR about the individuals or organizations that have not paid their taxes till date. The scopes of the taxes extend to ‘Use Tax’ as well. Use Tax is the Sales tax paid by the purchaser which is directly remitted to the DOR, and the seller does not collect such tax. For example, in some cases, a purchase on Amazon.com invites Use Tax, which Amazon does not collect and the purchaser has to directly remit the tax to DOR. (Division of Sales and Use Tax). The bill also includes provisions to reduce “income tax deductions, shifting money from the road fund and committing additional revenue from federal tax changes (Keegan). Such a law is not the first of its kind; Texas and Nebraska have similar plans that provide retirement security to its public employees. Moreover, it provides for a fresh trade-in tax credit on the buying of a new car. The policy makers as well as the Governor have tried to make a plan that adequately funds to cover the increased ARC, which will not make them cut funding into other vital services such as Safety, Education and Health Care services. In spite of many cuts in the budget, the Government has tried to cover for these services in the last five years. However, with the absence of a proper funding plan and the increasing liability in the pensions, it would have cut into these vital services, especially with the huge Pension Liabilities eating into these services. In fact, the huge Pension Liability had severely damaged the economic and financial outlook of Kentucky. S&P updated Kentucky’s financial outlook to negative in February, giving the unfunded pension liability as the main reason for it downgrading its rating from stable to negative. A year earlier, Moody’s Investor Service had reduced Kentucky’s bonds and kept a negative rating. It gave the same reason as S&P. This resulted in increased borrowing rates for the Government to invest in Public Infrastructure, which in turn increases the burden on taxpayers. (Keegan). However, in some cases the license will not be suspended if, (a) the Taxpayer is sent a ‘Notice of Tax Due’ and he/she still has time left to challenge that notice. (b) The taxpayer notifies the Department of Revenue in time that he is challenging the notice, or works out a mutually agreed plan to sort out the issue; (c) The taxpayer is bankrupt and has filed for bankruptcy under the law. (d) The tax payer is ‘delinquent’ but is conforming with the payment plan offered to him by making timely payments under the plan and; (e) The taxpayer had approached the court, and is conforming with the judgment of the court. Objectives of House Bill 440: “In order to better prepare our state for the future, we must study how we can better align our tax code with the principles of fairness, business competitiveness and a 21st Century economy. An improved tax code will not only create a more welcoming business environment, but will also allow the state to invest in the services and priorities that best position our citizens for success.” —Steve Beshear GOVERNOR   “This effort to review and revise our tax code is critical, not only for our budget outlook but also for our future economic success as Kentuckians. Making the right changes to our tax system will allow us to make the key investments in education and workforce development that will propel Kentuckians into a more secure and successful economic future.” —Jerry Abramson LIEUTENANT GOVERNOR The main objective of this bill is to clear the unpaid pensions in the Commonwealth of Kentucky which are in arrears of approx. $13.9 billion. (Keegan) The problem however, is that the total arrears in taxes for the state amounts to approx. $400 million only till 2013. The question that arises is where will the remaining $13.5 billion come from and is it necessary to impose such a draconian law to fund $400 million which may not even fully materialize and yet put taxpayers in a quandary. Implications of House Bill 440: The bill is aimed at clearing the States Pension Liabilities which are in excess of $45.8 billion. (Keegan) The challenges of public pension have taken Kentucky years to burden with, the solution will not come in a matter of days, the Kentucky Retirement System will take years to be fully funded even if the reforms are fully enforced. Lawmakers will have to strictly adhere to financial corrections, without it, these policies cannot prove to be successful (Keegan) Despite the various provisions in the law, taxpayers will see very little difference in the total taxes they pay. HB440 will reduce personal tax credit by $10, which in turn shall result in $32.5 million in addition to the General Fund per annum. It is expected that a further $30 million will be generated due to federal tax changes. Moreover, the advent of new technology and stricter compliance shall result in the state collecting taxes in accrual in a more effective way, which will result in $37.4 million increase every year once its fully implemented. These reforms are expected to improve clarity for the taxpayers, by creating a website for the taxpayers who will give them access to their financial obligations. There is an idea floating around regarding the creation of a ‘Public Pension Oversight Board’ to evaluate the retirement systems in the state of Kentucky. Supposedly, the board members of the Pension fund will increase from nine to thirteen. The new additions will come from nominations from the Kentucky Association of Counties, the Kentucky League of Cities and the Kentucky School Boards Association; with a fourth chosen by election from CERS. (Lane Report) Pamela Trautner, a spokeswoman for the Finance & Administration Cabinet, believes that the law will allow DOR to not renew Professional and Driving licenses issued by the Kentucky Government, nor will allow the vehicle registration to be renewed for people who haven’t cleared their taxes. (Spears) This is a way of dealing with taxpayers who despite losing their appeals are still not paying any state tax apart from the taxes collected at the local level. This law will in specific target attorneys who have not cleared their due taxes. For this, DOR will have to consult and advise the Supreme Court, which is in charge of overseeing the default payments in taxes of the attorneys. A spokesperson for the Kentucky Bar Association, Amy Carman said that any notices received by Attorneys will be referred to the Supreme Court for “appropriate action” (Spears) Charles Lykins, the executive director of the Kentucky State Board of Hairdressers and Cosmetologists, believes very few cosmetologists will be affected by this law in Kentucky. (Spears). Although, he remains nonchalant about this, his board has been asked to send over the list of people to the DOR his board has licensed. The DOR is not sure how many will be affected with this law change, though Trautner believes over 95% of the people in Kentucky pay their taxes on time. She adds that this law is brought into force for those “who have just ignored every effort that revenue has made.” (Spears). The people who are in default shall be issued notices post July 1. The Government is working on a pay in installment scheme for the defaulters. This is to avoid the licenses being revoked with immediate effect. Those who agree will receive a ‘payment plan’ and shall be regarded to conform to the change in policy and their licenses shall not be revoked immediately. They will however have to strictly adhere to the payment plan offer and even one missed or late payment may result in sanctions. The spokesman for the Transportation Cabinet, Chuck Wolfe says that,” the Department of Motor Vehicle Regulation already withholds drivers licenses for a variety of reasons, including when it gets notices from the Administrative Office of the Courts of certain traffic convictions. "Its a mandate we will carry out," Wolfe said. "It will be very similar to what we already do with notices from AOC."(Spears) However, the Chairman for Senate Transportation Ernie R-Crestwood has said that he wants a report on this law change from the DOR and he went on to assure the taxpayers that it is not as big a burden as it is being reported. He adds that the public should wait for more information before making any assumptions. (Spears) Similar Laws in other States: The commission for Governor’s Tax Reform has reported that the States of Massachusetts and Delaware have identical policies which rescind or deny Professional License, Driver’s License and Vehicle Registration. However, in the states of Hawaii, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Minnesota, Missouri, New Jersey, North Carolina, Oklahoma, Oregon, Pennsylvania, Vermont, and Wisconsin, only Professional Licenses can be revoked. These states do not have provisions to cancel or deny Drivers License or Motor Vehicle Registration on the basis of a person being a delinquent taxpayer. (Spears) Kentucky had introduced a Tax Reform in 2005 through House Bill 272. (Loyd p.8). This reform did away with Corporation license tax, which was payable on Capital, along with Intangible Property Tax. These were replaced with a ‘Gross Receipts Tax.’ The liberalization of tax policies had got Kentucky in sync with other States and did away with its ‘Balance Sheet type taxing’ which was considered outdated. Kentucky expanded the Corporation income tax rate to make them adjust with the rates for income tax. (Loyd 8) Conclusion: CPA Mark A. Loyd believes that “Tax Reforms in Kentucky is like a cicada brood. One appears every decade or so and makes a lot of noise.” He cites the example of the Blue Ribbon Commission. (Loyd 9) Some believe that tax reforms should automatically mean and result in an increase in tax revenue for the Government else it’s benign. However, that is not always the case. The tax system can be overhauled in many different ways, it can be done by introducing new taxes, increase or decreasing the tax rate or extending or narrowing the scope of taxation. The following table represents the proposed changes and its expected outcomes over the period of 2015 and 2016. Description of Source/Change FY 2015 Millions FY 2016 Millions General Fund Tax Revenue from reducing personal income tax credit from $20 per person to $10 per person $32.5 $32.5 Compliance and Technology Efforts $33.2 $37.4 Impact of Federal Tax Law Changes $30.0 $30.0 Total $95.7 $99.9 (Keegan) However, the fact of the matter remains that the proposed changes in the law do not sufficiently fund the Pension Fund Liability. Policymakers argue that these reforms shall result in a $100 million increase. Yes, but it is not nearly enough to cover for the liabilities in excess of $18 billion. Moreover, these changes are being made after fully exhausting all avenues of legislative options available to the Government. (Keegan) Kentucky Centre for Economic policy analyses the reform as: Although, officially, new General Fund is expected to increase by $95.7 million, $30 Million of revenue from that can be attributed to changes in Federal Tax Laws and not owing to House Bill 440. Moreover, the Bill eats into $34 million from the Road Fund, by providing a ‘trade-in-credit,’ for the value of the old care while purchasing a new car. If these items are discounted from the projected $95.7 million, then the true impingement of House Bill 440 is actually $31.7 million, and not $95.7 million. Critics believe that this is not even the worst part. The worst is the cash-balance component of the bill which reduces the retirement security of public employees. Critics suggest that with decreased salaries, it would be difficult to find and employ quality personnel in important services such as Police, Fire Fighters Librarians etc. (Barger). Moreover, as the all public employees are not under the benefit of Social Security, and the new reforms do not guarantee Retirement Benefits, these policies may contradict IRS Regulations regarding sufficient security for Employee Retirement, these policies may face lawsuits from Retired Public Employees. Moreover, it is being reported that early indications suggest that most people are not co-operating with the local authorities. This may result in the cancellation of licenses of people who have already paid their taxes and have no arrears. If this were to happen, this will further attract lawsuits and Penal charges from such people who have unfairly got their licenses revoked. According to Lowell Reese, former CEO of South Carolina Chamber of Commerce and the Arizona Chamber of Commerce, SB2 is overhyped. (Reese) He says that the bill did not steady the ailing pension system in the short run and it probably will not be able to steady it in the long run as well. He believes that SB will raise the taxpayers cost by around 44% per annum till the next two years. (Reese). It is being said that post the two year period; savings will be in reckoning and will amass close to $10 billion. However, Reese argues that the $10 billion figure is over rated and exaggerated. He reasons that since inflation and the government’s payroll size increase have not been accounted for in this estimate, along with no provisions for improvements in public employee benefits, this estimate would be proved wrong. (Reese) How HB440 affects business in Kentucky: Currently Retailers are allowed to receive up to $1500 per month. HB 440 will reduce the total to $50 per month, giving reason that technology improvement have cut down on transaction cost. The state projects that approximately 14% of retailers will be affected by this tax change, including big stores, grocers and utility stores.(Wynn) Moreover, drivers of commercial vehicles(for transport of people or goods) will be rendered either unemployed or will resort to driving without valid licenses or permits. This will create a legislative problem. (Wynn) Jason Bailey, who is the Director of Kentucky Center for Economic Policy has said that the plan will only result in a ‘slight’ tax increase. This is equal to about $30 for a family of three earning about $35,000 per annum.(Wynn) However, it is the taxpayers who are just above the poverty line and cannot afford to buy new cars that will bear the brunt of this bill. However, Governor Beshear believes that since 600,000 taxpayers are ‘just above the poverty line’ do not even use the personal income tax credits because they have other sources which negates their income tax liability. Hence, he says they shall not be affected at all. (Wynn). Earlier, there was a loophole in the system that allowed subsidiary companies of the Holding company to charge management fees in order to disguise the taxable income. That loophole has been closed by this bill now and it is expected to increase tax revenue by approximately $15 million every year. Furthermore, the compensation decrease for collecting Sales Tax to Retailers will generate a further $11.2 million. However, it will hurt retailers engrossing in excess of $50000 in taxable sales every month. What is worse that some of these may be Non-Profit Organizations that sell goods for the purpose of charity (Wynn). References: Barger Steve. "Kentucky Public Pension Coalition (KPCC)." State Lawmakers and Governor Closed Door on Kentuckians in Passing Pension Overhaul. 2013. Division of Sales and Use Tax. "Department of Revenue." 2013. Kentucky Division of Sales and Use Tax. 6 March 2013 . Keegan Brian. Widening Gap Update: Kentucky. 2014. 7 March 2014 . Kentucky Legislature. Kentucky Government Official Website. 3 March 2014 < http://www.lrc.ky.gov/pubinfo/release.htm>. Lane Report. Pension reform passes; creates hybrid cash-plan for new employees. 2013. 7 March 2014 . Loyd Mark A. "Reflections in Tax Reform." The Kentucky CPA Journal (Issue 2 2013): 8-11. Reese Lowell. "The Unsustainable: Kentucky’s Public Employee Pension Systems A primer and analysis of Kentucky’s state-administered plans." The Kentucky Gazette (25 July 2012) 7 March 2014 . Spears Valarie Honeycutt. Kentucky Tax Cheats could lose drivers and professional licenses starting July 1. 7 June 2013. 7 March 2014 . Wooden Michael W. Report House Bill 440 (Relating to Delinquent Taxpayers and Suspension/ Revocation of Professional License, Drivers License and Motor Vehicle Insurance. Kentucky, 2013. Stoll Keegan Ogden. Law Firm: State and Federal Tax Practice, 2013. Wynn Mark Critics call Kentucky pension funding bill a tax increase that will hurt the working-class Career Journal, March 31, 2013. 9 March 2014. < http://www.courier-journal.com/article/20130330/NEWS0101/303310051/Critics-call-Kentucky-pension-funding-bill-tax-increase-will-hurt-working-class?nclick_check=1> Read More