The 3rd meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, September 24, 2009, at 1:00 PM, in Room 154 of the Capitol Annex. Senator Bob Leeper, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Bob Leeper, Co-Chair; Representative Rick Rand, Co-Chair; Senators David E. Boswell, Tom Buford, Denise Harper Angel, Ernie Harris, Dan Kelly, Alice Forgy Kerr, Vernie McGaha, R.J. Palmer, Joey Pendleton, Tim Shaughnessy, Brandon Smith, Robert Stivers II, Gary Tapp, Elizabeth Tori, and Jack Westwood; Representatives Royce W. Adams, John A. Arnold Jr., Dwight D. Butler, James R. Comer Jr., Mike Denham, Danny Ford, Derrick Graham, Keith Hall, Jimmy Higdon, Jimmie Lee, Harry Moberly Jr., Fred Nesler, Sannie Overly, Don Pasley, Marie Rader, Jody Richards, Tommy Thompson, Tommy Turner, Jim Wayne, Ron Weston, and Brent Yonts.
Guests: Mr. Todd Cassidy, Kentucky Tourism Development, Arts, and Heritage Cabinet; Commissioner Tom Miller and Mr. Mac Gillim, Kentucky Department of Revenue; Mr. David Adkisson, President, Kentucky Chamber of Commerce; Ms. Deborah Clayton, Ms. Donna Duncan and Ms. Holland Spade, Kentucky Cabinet for Economic Development.
LRC Staff: Pam Thomas, John Scott, Jennifer Hays, Whitley Herndon and Christina Williams.
Chairman Leeper entertained a motion to approve the minutes from the August 27, 2009 meeting. The motion was seconded and passed by voice vote.
Mr. David Adkisson, President, and Mr. Bryan Sunderland of the Kentucky Chamber of Commerce, and Mr. John Cubine, a private consultant, addressed the committee regarding the mismatch between revenue receipts and expenditures. Mr. Adkisson referred to this problem as the “leaky bucket”, which was the theme for his PowerPoint presentation. Mr. Adkisson stated that state revenues decreased by 2.7% for 2009, but that several state expenses have increased during the same time period, creating “leaks in the bucket.” Increased expenditures are primarily found in the areas of public employee benefits, corrections, and Medicaid. Mr. Adkisson then noted that the state could increase revenues, decrease expenditures, or manage expenditures more efficiently. He suggested that the state manage healthcare costs, Medicaid, and corrections expenditures more effectively through modernizing state government, refocusing priorities and re-evaluating spending practices.
In response to Mr. Adkisson’s presentation, Senator Kelly stated that one area where significant savings can be quickly realized without any damage to public safety is corrections. He stated that rather than incarceration, alternative, less costly consequences could be imposed for some crimes, such as second offense drug use charges. Senator Kelly stated that these types of changes could save the state approximately $100 million annually.
Senator Boswell expressed his concerns regarding the cost of corrections in the state, discussing inmate costs and prison maintenance. He also expressed agreement with Senator Kelly that an alternative method should be found to address second offense drug convictions.
Representative Ford asked if the numbers listed on the “Tax Climate Index” slide from Mr. Adkisson’s presentation were weighted by population. Mr. Adkisson responded that the different components that make up the tax climate index come from different sources and that he would provide Representative Ford with the information relating to the sources. Mr. Adkisson noted that in the Tax Climate Index, Kentucky has gone from 34th to 20th in the nation between this year and last year.
Senator Westwood suggested that one way to increase revenues is to focus on economic development to attract new industries and other businesses, and asked Mr. Adkisson if the Chamber has any ideas on growing or stimulating Kentucky’s businesses. Mr. Adkisson responded that the Chamber believes that a continued focus on education and economic development is important, and that the state should be careful about diverting funding from these purposes.
Senator Shaughnessy stated that if the public employees’ healthcare is the largest growing cost, it must be managed diligently so as not to erode funds for other budget areas. He also noted that there is no simple solution to the issues facing the Commonwealth, and that addressing revenue shortfalls and growing expenditures is a complex task.
Representative Graham asked Mr. Adkisson whether the Chamber would be willing to support tax increases or to “give back” some tax breaks if necessary to continue to support important priorities like education and development. Mr. Adkisson responded that he is not familiar with the specific tax breaks Representative Graham is referring to, but that according to a national study comparing all states, businesses in Kentucky pay approximately 40% of the taxes paid, and that the amount paid by businesses has remained relatively stable over the years. Mr. Adkisson suggested that before tax increases or the repeal of tax breaks are considered, the “leaky bucket” should be repaired.
Chairman Leeper asked if all of the revenues discussed in the presentation were tax revenues, or if fund transfers and revenue from other sources were included in the figures presented. Mr. Adkisson replied that that fund transfers and tobacco tax revenues were excluded from the figures.
Senator Kelly asked whether Kentucky’s change in stature in the “Tax Climate Index” from 34th to 20th is a good thing, and Mr. Adkisson responded that it is.
Next, Mr. Todd Cassidy, Executive Director of Tourism Development for the Kentucky Tourism Development, Arts and Heritage Cabinet addressed the committee concerning recent changes to Historic Preservation Tax Credits, the Tourism Development Act, and film industry incentives.
Chairman Leeper asked how the incentive program requirements are monitored relating to the measurement of visitors from out-of-state. Director Cassidy responded that the attractions are required to submit annual reports which include documentation that the statutory percentage requirement for out-of-state visitors is met. He noted most attractions use zip code data from credit card transactions as the standard for the information in the reports, although some, like Newport on the Levee, which involves several different retail locations, will survey license plates in the parking lot periodically to determine where visitors are from.
Senator Shaughnessy asked for an example of a not-for-profit that might qualify for incentives under the Tourism Development Act. Director Cassidy responded that the Louisville Zoo is a not-for-profit organization that could qualify for incentives, however the cost of the initial study, if the zoo were required to pay for it, would not be recouped for 2-3 years, making participation in the program unaffordable. This is why the statute was amended to allow the cabinet to provide an internal study for smaller projects proposed by not-for-profits.
Representative Moberly asked if a study has been done to determine the effectiveness of the Tourism Development Act. Director Cassidy responded that he was not aware of a specific study concerning that issue, but the Legislative Research Commission will receive annual reports, which will also be posted on the cabinet website concerning number of applications, total incentives offered, and that amount of funds that have been claimed to date. Director Cassidy also noted that each project must have a completed study finding a positive economic impact before incentives can be provided.
Representative Moberly then asked for the benefits of the Tourism Development Act. Director Cassidy stated that projects approved under the Act have provided an approximate $5.8 billion net positive fiscal impact to the Commonwealth. Representative Moberly asked for the benefits to the companies or the entities that qualify for the program. Director Cassidy stated those who qualify receive up to 25% of their development costs per project. Representative Moberly asked if it was assumed these developments would not have happened without the Tourism Development Act. Director Cassidy stated he knew of at least two instances when the programs were looking at sites outside of the state, until they learned of the Tourism Development Act. He further stated there is a page in the application that must be signed stating if it were not for the Tourism Development Act, that they would not be moving forward with their project.
Next, Representative Moberly asked if the Historic Preservation Tax Credits are refundable. Director Cassidy stated that they are. Representative Moberly asked whether builders or individual home owners have benefitted the most from those credits. Director Cassidy responded that the Heritage Council would be able to answer the question more thoroughly, but that he believes that the available credits are divided between individual homeowners and developers. Representative Moberly noted that this credit could provide the ability for people who have large tax liabilities to relieve themselves of substantial amounts of state income tax liability.
Senator Harris asked if there has been increased interest in films being made in Kentucky since passage of the new film incentives. Director Cassidy responded there has been a significant increase in phone calls asking about the incentive program. He also noted that in addition to “Secretariat”, which has already been approved for incentives, there is one pending that has not yet been considered by the authority.
Chairman Leeper asked if Director Cassidy is satisfied that there are significant safeguards in place for the film incentive program to protect Kentucky from issues like those that have arisen in Iowa and Louisiana. Director Cassidy replied that he believes Kentucky is well protected because the application process funnels through two agencies, because applications must be approved by an independent authority, and because of the public disclosure requirements.
Representative Moberly asked whether, if a filmmaker spent $4 million in Kentucky, the state would send them an $800,000 tax refund. Director Cassidy stated that Representative Moberly’s example was correct.
Next, Mr. Tom Miller, Commissioner of the Kentucky Department of Revenue; and Mr. Mac Gillim, Executive Director of the Office of Processing and Enforcement for the Kentucky Department of Revenue updated the committee concerning enhanced collection efforts being made by the Department and how additional positions funded by the General Assembly during the last budget cycle will be used to enhance collections.
Representative Adams asked which areas are being targeted for enhanced collection efforts. Commissioner Miller replied the Department is expanding its compliance initiative for different taxes, such as individual income tax, corporate tax, coal severance tax, and withholding tax. Commissioner Miller also said that the Department is looking for ways to more efficiently collect delinquent taxes already on the books. Representative Adams asked if the Department is offering an amnesty program. Commissioner Miller responded that no amnesty program is being offered at this time.
Representative Higdon commented that he would like to see the Department do a better job communicating with retailers about the sales and use tax because he believes that there are many retailers that do not understand the application of the tax.
Senator Harris asked if those being hired to enhance collection efforts have some accounting background. Commissioner Miller stated a significant number of applicants have been auditors who have accounting backgrounds or revenue program officers who have a degree or experience to substitute for the degree. He also said that one of the requirements to be an auditor is an accounting degree or over 20 credit hours of accounting.
Finally, Ms. Debra Clayton, Commissioner of the Department of Commercialization; Ms. Donna Duncan, Commissioner of the Department of Financial Incentives; and Ms. Holland Spade, Executive Director of the Office of Legal Services with the Cabinet for Economic Development provided an update to the committee regarding the Cabinet for Economic Development’s current economic development incentives.
Chairman Leeper asked how the Cabinet verifies that communities are meeting the requirements for these programs. Commissioner Duncan responded that the Cabinet requires recipients to submit documentation to verify they are meeting the requirements.
Representative Richards asked which job areas are currently seeing the most growth. Commissioner Clayton stated that health and human development, biosciences, information technology, advanced materials, and energy and environment are seeing job increases.
Chairman Leeper asked if any stimulus money was earmarked for the economic development initiatives. Commissioner Clayton replied that some money has been earmarked for economic development, and that currently the Cabinet is working with the Energy Cabinet to finalize a grant which they received. She stated that the Cabinet would be the grant recipient and they will solicit applications for these funds from other companies. Chairman Leeper next asked how the cabinet is informing the public regarding the small business portion of House Bill 3. Ms. Spade stated there is a small business tax credit program as part of House Bill 3 and that the first tax year that business may take the credit is 2012. She stated that applicants must establish and maintain one new job for one year before they are eligible so those who could possibly be eligible will be notified in 2011.
Senator Leeper asked for the Cabinet’s budget priorities for the next two years, and Ms. Spade responded that the Secretary will answer that question for the committee at a future meeting.
Senator Leeper asked what constitutes a “construction job” – for example, a news report for a new project might state that the project will create 300 construction jobs and 50 permanent jobs. Commissioner Duncan responded that, for purposes of their programs, construction jobs are not counted or considered for purposes of compliance, so they do not really track or define “construction jobs.”
Chairman Leeper thanked those who testified and the meeting was adjourned at 3:15 PM.