Call to Order and Roll Call
The 4th meeting of the Interim Joint Committee on Licensing and Occupations was held on Friday, September 14, 2012, at 10:00 AM, at Southern Wine and Spirits in Louisville, Kentucky. Senator John Schickel, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator John Schickel, Co-Chair; Representative Dennis Keene, Co-Chair; Senators Tom Buford, Jimmy Higdon, and Dan "Malano" Seum; Representatives Tom Burch, Larry Clark, Dennis Horlander, Wade Hurt, Joni L. Jenkins, Adam Koenig, Reginald Meeks, Charles Miller, Michael J. Nemes, David Osborne, Darryl T. Owens, Ruth Ann Palumbo, Arnold Simpson, and Susan Westrom.
Guests: Pat Crowley, Wine and Spirits Wholesalers of Kentucky, Kentucky Beer Wholesalers Association and Kentucky Malt Beverage Council; Paul Coomes, PhD, Dan Meyer, Wine and Spirits Wholesalers; Rick McQuady, CEO, Kentucky Housing Corporation; Tom Underwood National Federation of Independent Businesses and Raleigh Brunner, Wildcat Moving, and Joshua P. Thompson, Pacific Legal Foundation.
LRC Staff: Tom Hewlett, Bryce Amburgey, Carrie Klaber, Alan Jones, and Susan Cunningham.
Approval of minutes
A motion to approve the minutes from the August 27, 2012 meeting was made by Representative Keene and seconded by Senator Seum. The motion carried by voice vote. Pete McLaughlin, Vice President and General Sales Manager of Southern Wine and Spirits of Kentucky, welcomed the committee to the facility.
Alcohol Taxation in Kentucky
Pat Crowley, representing the Wine and Spirits Wholesalers of Kentucky, Kentucky Beer Wholesalers Association, and the Kentucky Malt Beverage Council, and Paul Coomes, PhD, an economist formerly with the University of Louisville, presented a video regarding taxation of the malt beverage, wine, and distilled spirits industry in Kentucky. The 2007 census of the industry showed $871 million in annual sales, with 1,711 wholesale distribution jobs and a total payroll of $70.4 million. The figures do not include jobs at retail distributors such as grocery stores, bars, restaurants, and specialized stores. In 2011, the industry collected over $112 million in wholesale tax receipts. Kentucky law mandates the use of a three-tier system. The first tier is the supplier who must sale to the second tier, the wholesaler, who must then sale to the third tier, the retail outlets.
In 1982, Governor John Y. Brown, Jr., asked the industry for help with tax collection. Because not all entities were paying their appropriate taxes, legislation was passed removing the retail tax and putting the tax at the wholesale level. Thus, the wholesalers were in a sense collecting the retail tax for the Commonwealth. In 2006, Kentucky raised its wholesale tax from 9 percent to 11 percent. In 2009, a 6 percent tax was added on retail sales. Since 2006, taxes on the wine, malt beverages, and distilled spirits have risen 88 percent.
Wine, malt beverages, and distilled spirits are triple taxed. There is the 11 percent wholesale tax. There is an excise tax that has specific taxes for beer ($2.50 per barrel), wine (50 cents per gallon), and distilled spirits ($1.92 per gallon plus an additional 5 cents per case sold). There is the blanket 6 percent sales tax on all types of beverages sold.
Dr. Coomes commented that Kentucky is one of the most porous states in the nation with seven bordering states, with only Missouri and Tennessee having more borders. A census in 2010 shows that over 50 percent of Kentuckians live in a county that borders another state. Forty-Four percent of this population is in Northern Kentucky on the Ohio River. This creates more opportunities for Kentuckians to purchase alcohol from other states with lower prices. Since the implementation of the 6 percent sales tax in 2009, the number of cases of beer sold has declined by over 6 percent and this appears to be a continuing trend. Retailers in Northern Kentucky have reported that Ohio customers are now staying in Ohio; and Kentucky customers have begun to drive to Ohio, purchase beer, and bring it back to Kentucky for consumption. Additionally, wine sales have not been on par with national growth, even though wine consumption has increased. Between 2007 and 2010 the reduction in the number of cases sold amounted to $32 million. This led to a loss of 63 wholesale distribution jobs and $2.6 million in lost payroll.
When comparing tax rates on alcohol sales in surrounding states, Kentucky is among the highest in wine, malt beverages and distilled spirits taxes. States where beer is produced--such as Colorado and Wisconsin--have the lowest tax rates on alcohol. Kentucky has the highest rate of taxation on wine. In California and New York, the two highest producers of wine, the tax on wine sales is the lowest. Kentucky accounts for 95 percent of all the bourbon produced in the world and accounts for 35 percent of the distilling jobs. However, taxation of distilled spirits is still heavy at the retail level, sending a bad signal to distillers. The industry feels that another tax increase will create further deterioration in the industry.
In response to a question from Representative Owens, Dan Meyer said the industry would like to see a roll back of the wholesale tax from 11 percent to 9 percent. Also, the sales tax in 2009, which was levied on retail sales, has caused Kentuckians to purchase alcohol across the border, particularly in Ohio. Elimination of the retail tax on alcohol could boost sales significantly. Senator Buford opined that reducing the tax would increase sales in Kentucky, allowing for more taxes paid on those sales. Also, increased sales from reduced taxes would create a need for more jobs and more payroll taxes paid. In response to a question from Representative Meeks, Dr. Coomes said he would supply a copy of his full report produced for the wholesalers. That report looks at all areas of consumption and sales comparing Kentucky to its border states, using controls for the general state of the economy.
Kentucky Housing Corporation
Rick McQuady, CEO of the Kentucky Housing Corporation (KHC) said the agency was created in 1972 to provide affordable housing opportunities to low and moderate-income families. Since that time, KHC has provided funds for mortgage loans for first homes, administered federal dollars provided to agencies throughout Kentucky that assist the homeless population, and financed construction. All federal resources for housing in Kentucky come through KHC.
The Affordable Housing Trust Fund (AHTF) was created by the legislature in 1992 to provide additional financing resources to address the housing needs of Kentuckians whose maximum income is no more than 50 percent of an area’s median income. In the past, funding has come from different sources, such as the General Fund. Money from unclaimed lottery winnings was used to fund the AHTF, but the AHTF is now funded by money received from the county clerks. Six dollars from each fee collected by the county clerks goes to the trust fund. KHC was also required to deposit $500,000 into the AHTF from its discretionary account.
Over 9,000 units have been created with AHTF dollars statewide. The fund fills a gap for low-income families and provides a way for them to achieve home ownership. Additionally, 40 percent of the dollars must be spent in rural areas of the state. The KHC has been able to fund units in 119 of the 120 counties in Kentucky.
The KHC would like to expand the eligibility for nonprofit sponsors and developers that utilize housing credits to create affordable multi-family housing. Housing credits were created by the federal government in 1986 to provide for affordable multi-family housing. The statute requires the board of directors to apply deed restrictions on the sale of a house that has received AHTF dollars. The KHC funds multiple rehab projects that cost less than $1,000. It is cumbersome for staff and families receiving the funds to have a five year deed restriction for small projects such as a new roof.
Mr. McQuady said KHC would like to amend KRS Chapter 198A in the KRS. KHC wants to remove language regarding the unclaimed lottery proceeds and change reporting requirements since the agency no longer receives those monies. Also, the law requires applications for funds to be reviewed within 60 days. KHC would like to extend this time to 90 days. The application for funds is called a “consolidated funding application.” It is used to apply for all the resources at once. Some of these resources could be federal funds that require an environmental review that could take a longer amount of time. KHC partners are fully supportive of this longer application time. Because priorities of the state change over time, KHC would also like to remove the graded priorities.
KHC would like to raise fees for recipients who are local non-profit organizations. Recipients receive a five percent administrative fee. The KHC recommends that this be raised to 10 percent.
KHC also requests more flexibility in determining geographic distribution. Urban areas are listed in statute. In other programs administered by KHC, criteria are used to determine urban and rural eligibility based on incomes in the area as well as the area’s population. KHC would like this criteria-based approach to be added to the statutes instead of simply listing locations.
Finally, regarding the notification to a community of the construction of a multi-family project, the proposed change would allow for transparent notification. It would ensure that the CEO of the community, whether it is a county judge or mayor, is notified prior to the application, as well as after the funding for the project is approved. This would also ensure that KHC is in compliance with all fair housing laws.
Senator Higdon said he plans to file legislation regarding all the items Mr. McQuady discussed. He added that the AHTF board did a good job handling allotted money.
In response to a question from Representative Keene, Lisa Baron, KHC General Counsel, stated that the change in deed restrictions the agency is requesting would secure the dollars that KHC lends to the home. It is separate from the deed restrictions involving a development. In response to a question from Senator Seum, Mr. McQuady said “recipients” are either units of local government or non-profit agencies. Organizations such as the Housing Partnership in Louisville or Frontier Housing in Morehead and Self Help Housing in Vanceburg are non-profit organizations that serve a community and are examples non-profits that receive a five percent fee under the current system.
KHC is funded through a variety of methods. The only state money received is for the AHTF. The largest amount of money the KHC receives comes from the Department of Housing and Urban Development at the federal level. KHC administers Section 8 funds for smaller counties whose housing development departments cannot handle the administrative burden. The Home Program, a block grant program, funds rental production, home ownership production, rental rehab, home ownership rehab, and tenant-based rental assistance. Kentucky is one of the few states that uses the home funds for all eligible uses. KHC also receives housing credits from the Internal Revenue Service to be used for construction of rental houses.
KHC recently received federal funds for a program called the unemployment bridge program. This program provides assistance to persons who have lost their jobs to help them stay in their homes. This resource has helped over 2,000 families. In addition to the other source already noted, tax exempt revenue bonds with an interest rate spread are used to fund KHC operations.
In response to a question from Representative Koenig, Mr. McQuady said if fees were raised for local nonprofits there would be less money available for construction. In response to another question he said the AHTF statute specifically defines the areas that are urban. Urban areas are Ashland, Bowling Green, Covington, Henderson, Hopkinsville, Jefferson County, Fayette County, Owensboro and Paducah. In other programs, KHC urban area criteria are median incomes of $48,000 or more and a population of at least 20,000. KHC will work with the committee on language to define urban versus rural.
In response to a question from Representative Owens about locating multifamily units, Mr. McQuady said the review process includes a market study that takes into account zoning ordinances and fair housing laws. The community will still have control over where multifamily units are placed.
In response to a question from Representative Meeks, Mr. McQuady said the statute requires the corporation to use at least 40 percent of all funds received for rural areas. KHC staff will supply further information regarding the exact percentage going to rural areas. The Housing Policy Advisory committee has studied census data to determine the needs.
Representative Clark said he appreciated the job the KHC does; however, the local government should not be the only one consulted. The mayor or county judge should allow the local governing body should have some say in the decision making regarding where multifamily units are placed. There should also be more background checks in place for the companies awarded contracts for developments.
Wildcat Moving Company
Tom Underwood, State Director, National Federation of Independent Business, said that to become a mover of household goods in Kentucky a company must have a Department of Transportation (DOT) inspection, insurance, and bonding, and a Kentucky Household Goods Moving Certificate. When an application is made for a moving certificate, the DOT sends a copy of the application to current certificate holders in the area for comments. This process, along with hearings from involved parties in the area, can take up to a year to complete. Since 2007, there have been five licenses issued. This statute was enacted in 1957.
Raleigh Brunner, owner of Wildcat Moving, told the committee that, since his business started two years ago, it has grown to have 31 employees and six trucks, and is doing well in the Central Kentucky market. Competitors have complained that he does not have the Household Good Moving Certificate. He has found the application process anti-competitive.
Joshua Thompson, staff attorney, Pacific Legal Foundation, told the committee that Pacific Legal Foundation is the nation’s oldest and most successful legal foundation dedicated to private property rights, limited government, and economic liberty. The competitive veto scheme that is in place in Kentucky for household goods moving certificates prevents people such as Mr. Brunner from pursing his right to earn a living. This competitive veto does not allow him to attend the hearing to present his case to the administrative board; rather he must hire an attorney, and there is a time commitment of multiple years. Mr. Brunner must prove that the market it inadequate, that there is a public convenience for his business, and that his business is in the public interest. None of this criteria has been defined, and only the administrative board knows what Mr. Brunner has to prove at the hearing. Meanwhile, the competitors can file an objection based on vague standards.
Mr. Thompson believes that the competitors’ veto is unconstitutional under the United States Constitution. Pacific Legal Foundation and Mr. Brunner have filed suit in federal court in Lexington under the Fourteenth Amendment’s Equal Protection, Due Process, and Privileges or Immunities clauses. The United States Supreme Court has ruled that laws that restrict the right to enter into a business must be rationally related to the applicant’s fitness, and capacity to practice the profession. Mr. Brunner has demonstrated that he meets the requirements to operate a moving business in Kentucky. However, the competitors’ veto scheme that prevents him from earning a living is not rationally related to his profession. The requirement to prove inadequacy has no relation to health, safety or welfare. The Sixth Circuit has held that it is not a legitimate state interest to protect established businesses against competition. There are also lawsuits filed in Oregon and Missouri against similar certificate of necessity laws. In both states, laws were amended to remove the competitors veto scheme and certificate of necessity before the cases went to court.
In response to a question from Representative Westrom, Tom Underwood said that certificates can be sold. There is a certificate being sold in Lexington for $40,000. Representative Meeks commented that the same competitors’ veto scheme is in place regarding limousine and taxi companies. Prior legislation regarding this has not been successful. In response to a question from Representative Palumbo, Mr. Underwood said that because the sale was pending on the moving company in Lexington, he would prefer not to comment on the identities of the parties involved.
In response to a question from Senator Higdon, Mr. Underwood said that based upon the entries on the internet service, Craig’s List, there are many companies that operate using available labor. Most of these companies are operating without insurance or bonding and present a risk to public safety.
Senator Buford commented that Certificate of Need discriminates against minorities. It protects businesses and not consumers, and it blocks new competition.
Senator Schickel told committee that there was a tour of the facility that would begin immediately following the conclusion of the meeting. There being no further business to come before the committee, the meeting was adjourned at 11:10 AM.