The 6th meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, December 14, 2006, at 1:00 PM, at Kentucky State University. Representative Harry Moberly Jr, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Charlie Borders, Co-Chair; Representative Harry Moberly Jr, Co-Chair; Senators David E Boswell, Tom Buford, Carroll Gibson, Denise Harper Angel, Robert J (Bob) Leeper, Vernie McGaha, R J Palmer II, Robert Stivers II, Gary Tapp, Elizabeth Tori, Johnny Ray Turner, and Jack Westwood; Representatives Royce W Adams, Joe Barrows, Scott W Brinkman, Dwight D Butler, Larry Clark, James R Comer Jr, Jesse Crenshaw, Bob M DeWeese, Jon Draud, Jimmie Lee, Mary Lou Marzian, Lonnie Napier, Stephen Nunn, Don R Pasley, Marie L Rader, Charles L Siler, Arnold Simpson, Tommy Turner, Jim Wayne, Robin L Webb, and Rob Wilkey.
Guests: John Walczak, Director, Louisville Zoo; Mark Wheeler, Chairman, Louisville Zoo Board of Trustees; Debbie King, Board of Trustees member; Mary Lassiter, Office of the State Budget Director; Jim Oliver and Ed Penn, Department of Revenue.
LRC Staff: Pam Thomas, Charlotte Quarles, John Scott, and Sheri Mahan.
President Mary Sias of Kentucky State University welcomed the committee to the college. Representative Moberly thanked President Sias for the hospitality always shown towards the committee by the university.
Ms. Debbie King and Mr. Mark Wheeler of the Louisville Zoo Board of Trustees and Mr. John Walczak, director of the Louisville Zoo, gave a presentation to the committee regarding the Zoo's Glacier Run project. Ms. King mentioned that a wallaroo and kookaburra were present for the member's to enjoy from the Zoo's Wallaroo Walkabout exhibit which was funded partially with state funds. Ms. King stated that the Zoo has raised $9.3 million of the $25 million needed to complete the Glacier Run project. She thanked the members for the $6 million appropriation provided in the budget, which was unfortunately later vetoed, and asked that the members again consider the importance of this project. She asked the members to consider a mid-term budget adjustment to allow the project to continue on schedule.
Mr. John Walczack then provided a virtual tour of the proposed project on DVD for the members. He discussed the inspiration for the Glacier Run project, provided project specifics, highlighted public education opportunities that will be provided, and discussed various animal species to be displayed in the exhibit.
Mr. Mark Wheeler discussed the importance of Glacier Run in the future continued growth of the Louisville Zoo. He stated that the Glacier Run exhibit will complete the Zoo's capitol projects strategic plan and will move the Zoo closer to its goal of 1 million visitors annually. Mr. Wheeler discussed the Zoo to You program which takes zoo animals into the community. He then discussed the economic benefits of the project. He stated that the University of Louisville projects that the completion of this project will result in 995 new jobs, $19 million in new payroll, $31 million of total spending, and $2.62 million in new state tax revenues.
Next, Ms. Mary Lassiter from the Office of the State Budget Director updated the committee regarding the projected revenue surplus. She stated that total revenues for the first quarter of FY07 grew 3.6% to $2.035 billion. This growth mostly occurred in the corporate income and license tax. Individual income tax, property tax and cigarette all show small declines.
Ms. Lassiter then discussed Office of the State Budget Director (OSBD) assumptions regarding adjustments to the consensus forecasting group's latest revenue estimates. She stated that because of adjustments made in the 2006 budget bill and reductions in revenue attributable to House Bill 1 from the 2006 Special Session OSBD had adjusted the official general fund revenue estimate has been adjusted upwards from $8.341 billion to $8.377 billion. If the estimate is correct, this would leave the General Fund with $278 million more than was budgeted. Moderate increases in sales and use tax and individual income tax are predicted, but the largest increase will be in corporate income tax, which is a nation-wide trend. This increase consists largely of a carry forward from FY06.
Representative Wayne asked if there has been a steady increase in the cigarette tax receipts. Ms. Lassiter replied that a slight decline is predicted for cigarette tax receipts through the end of the year.
Senator Stivers asked for the balance of the rainy day fund. Ms. Lassiter responded the there is $231.5 million in the fund at present.
Ms. Lassiter then discussed the road fund revenues for the first quarter of FY07. She stated that revenues were $303.3 million, down by $1.4 million from the predicted level of $304.7 million. She stated that motor fuels receipts lower than expected due to higher gasoline prices. Also, she said that the decrease in the motor vehicle usage tax is the larger concern, with decreased sales affecting the receipts.
Ms. Lassiter discussed adjustments made to the consensus forecasting group's adjusted estimates for the road fund. She stated that the official adjusted estimate is $1.238 billion, which reflects a $17 million decrease in revenues. She said that year to date the road fund shows 3.2% revenue growth.
Next, Mr. Jim Oliver, Mr. Ed Penn, and Mr. Matt Warfield from the Department of Revenue discussed cigarette tax stamp compliance efforts currently underway by the Department. Mr. Oliver provided a brief history of recent compliance efforts. He stated that the Department has increased inspections over the last five months. With the increase of the cigarette stamp tax from $.03 per pack to $0.30 per pack, increased inspections and enforcement are more cost effective for the Department to conduct and administer. The increase in inspections has also been encouraged by citizen complaints, wholesaler requests and the Master Settlement Agreement requirements.
Mr. Oliver discussed the revenue impact of black market cigarettes, stating that 304,000 packs have been seized in the last five months from 120 inspections. 284,000 of these packs were never reported by a Kentucky licensed dealer. He stated that the remaining 20,000 pack may have been reported by Kentucky licensed dealers, but the stamp was not affixed or was incomplete. The possible loss in revenue if the seized products had remained on retail shelves is $91,200. Mr. Oliver stated that stamp inventory deficiencies found during inspections have captured $394,000 in additional revenues. He provided examples of a proper tax stamp, tax stamp deficiencies found during inspections, and listed the counties where inspections have taken place.
Mr. Oliver discussed what happens to seized cigarettes, stating that the Department is required by statute to sell at auction the seized product back to licensed wholesalers. He stated that the Department is working with the Finance and Administration Cabinet through their surplus property auctions to fulfill the requirement.
Mr. Oliver next discussed the issue of the quality of the Kentucky tax stamp. He stated that some wholesalers have raised concerns regarding this issue. He said that Kentucky uses stamps produces by Meyercord, which produces stamps for 47 states and 150 municipalities. All Meyercord stamps are made at the same location, using the same process and same raw materials. Other components can be added to the stamps such as additional security features embedded in their stamps. The Department of Revenue does not currently use additional security features, but is considering it with the recent discovery of counterfeit stamps found outside the state.
Representative Webb asked what the process is once the unstamped product is found and confiscated. Mr. Oliver replied that the confiscation is the deterrent. The Department fills out an evidence sheet down to the pack level of what has been confiscated, and there is a twenty day protest period. Representative Webb asked if there is any civil remedy other than confiscation, and do other states have a different scheme for deterrence. Mr. Oliver replied that the Department has researched this, and that confiscation appears to be the standard deterrent. There is a specific provision in the Kentucky statute for non-compliance being a class D felony, but the Department has not pursued this.
Senator Stivers asked what revenues will be generated by the sale of seized product. Mr. Oliver stated it will be a bid process, and that there is no way to estimate the revenues since the Department has not auctioned any seized product to date. The proceeds of the sale will go into the General Fund.
Representative Webb asked if there is a prohibition against allowing the previous owner of seized product to bid at auction and reacquire the product. Mr. Oliver replied that he believes other deterrents besides confiscation must be investigated. He said that sometimes retailers will not produce invoices as to which wholesaler the product was purchased from.
Representative Wayne asked when the statute that requires seized product to be auctioned was enacted. Mr. Oliver replied that he believes it was enacted in the 1960s.
Finally, Ms. Donna Brown, Mr. Jim Glockner, and Mr. Scott White of the Kentucky Tobacco and Candy Wholesalers Association (KTCA) discussed the longstanding service the tobacco wholesalers provide to the citizens of the state. Ms. Brown stated that the KTCA encourages enforcement efforts, but that the efforts being put forth by the Department over the past five months are far too stringent. She stated that if there has been a legitimate attempt to affix a tax stamp to a product, then that should be considered a properly stamped product by the Department.
Mr. Glockner discussed the issues the association has with the confiscation of product, particularly at the retail level. He stated that the Department of Revenue is holding wholesalers to an excessively high standard in tax stamp application. They require that the entire stamp number be visible, and with the current stamps and machinery this is not consistently possible. He said that the current stamps and machinery can not meet the current standards held by the Department.
There being no further business, the meeting was adjourned at 2:45 p.m. A cassette tape of this meeting and all meeting materials are available in the Legislative Research Commission library.