Call to Order and Roll Call
The Program Review and Investigations Committee met on Friday, August 12, 2016, at 1:00 PM, in Room 171 of the Capitol Annex. Representative Terry Mills, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Danny Carroll, Co-Chair; Representative Terry Mills, Co-Chair; Senators Perry B. Clark, and Whitney Westerfield; Representatives Tim Couch, David Meade, Rick Rand, Arnold Simpson, and Chuck Tackett.
Legislative Guest: Senator Jimmy Higdon.
Guests: Ken Meng, Executive Director for Tax Policy & Regulatory Matters, Linda Benton, Manager of Miscellaneous Tax Branch, Office of Sales & Excise Taxes, Department of Revenue; Anna Casey; John Chilton, State Budget Director; Stacey Hickey, Bernard Miles.
LRC Staff: Greg Hager, Committee Staff Administrator; Chris Hall; Colleen Kennedy; Van Knowles; William Spears; Shane Stevens; Joel Thomas; and Kate Talley, Committee Assistant.
Minutes for July 14, 2016
Upon motion by Representative Simpson and second by Representative Tackett, the minutes of the July 14, 2016, meeting were approved by voice vote, without objection.
Kentucky Inheritance Tax
Co-Chair Mills explained that this topic arose because a constituent contacted him regarding her experience with the inheritance tax.
Mr. Meng summarized the history of the tax. In 1998, Class A beneficiaries were exempted from inheritance tax. In 2002, the estate tax was phased out and replaced with a tax deduction. The estate tax is a federal tax on the value of the estate. The inheritance tax is a state tax upon the beneficiary based on the relationship to the decedent.
The tax table determines the amount of inheritance tax due. In 1998, $105 million was received. The tax return is due no later than 18 months after the date of death of the decedent. The estate tax was phased out in 2004. Since 2006, receipts have been consistently less than one-half of the amount collected in 1998. A tax return must be filed when an estate passes to taxable beneficiaries. A 5 percent discount is applied when the return is filed within 9 months of the date of death. This occurs about 50 percent of the time.
Class A beneficiaries, who are immediate family members, are exempt from paying inheritance tax. Class B beneficiaries, who are extended family members, receive a $1,000 exemption and pay graduated tax rates. Class C beneficiaries are those not included in Class A or B. They receive a $500 exemption and pay graduated tax rates. Some organizations, such as educational institutions, religious institutions, and associations, are exempt.
Ms. Benton explained the process for reviewing inheritance tax returns. Probate documents are reviewed and, if a return is not received, a letter is sent to the executor to inquire about the beneficiaries and the status of the return.
Mr. Meng said that six states, including Kentucky, impose an inheritance tax. Two of those states also impose an estate tax. Ohio and Tennessee recently repealed their estate tax, and Indiana repealed its inheritance tax.
Representative Mills welcomed guests Senator Higdon, John Chilton, Stacey Hickey, and Bernard Miles.
Ms. Casey, a constituent of Representative Mills and Senator Higdon, explained her situation regarding inheritance tax. Originally from Massachusetts, she served as a nun for 21 years teaching high school math. She moved to Chicago and joined the Peace Corps. She was sent to Sierra Leone to work with the poor for 3 years. She moved to Louisville and taught for 33 years. During that time, she and a coworker, Mary Ann Graves, became roommates. They lived together for 45 years and bought six tenement houses. They also purchased a farm in Loretto, Kentucky.
At the age of 69, Ms. Graves passed away. Neither Ms. Graves nor Ms. Casey had wills, but they had discussed dividing their holdings evenly. Ms. Casey gave the four apartment buildings owned at the time to her nephews. She gave the farm to Ms. Graves’ nephew and his wife Ms. Hickey. Ms. Casey’s lawyer informed her that she would have to pay inheritance tax on the deal, but Ms. Casey thought it would be a minimal amount. Because the farm did not go to Ms. Casey’s family, she incurred $168,000 of inheritance tax. She obtained a bank loan to pay the tax, which she struggles to repay. Ms. Casey said that, had she known about the taxes, she would have prepared for the eventuality and saved appropriately. She is worried for the debt to Ms. Graves’ nephew and to others who may not be aware of the law. Ms. Casey said eliminating the inheritance tax would benefit the elderly and the young.
Representative Mills praised Ms. Casey for her courage in testifying.
Representative Simpson praised her for coming forth and for her service. Since the 1998 amendment, there are not that many people trapped in this net. Eliminating the revenue from this tax has consequences for funding of services. Since the recession, aid has been cut to children and higher education
In response to a question from Representative Simpson, Ms. Casey did not know how much of the tax bill is the original tax and how much is penalty and interest.
Representative Simpson urged Ms. Casey to talk to an attorney. He explained that it is difficult to eliminate a source of tax revenue without tax reform.
In response to a question from Senator Carroll, Mr. Meng said the inheritance tax is applied to whomever it defaults to if there is no beneficiary or will. The Revenue Cabinet has not looked into whether will be more revenue due to an aging population and inheritances going to nonprofits. The Budget Office may have more information on this. There are no residency requirements on inheritance tax because it follows the property.
In response to a question from Senator Carroll, Ms. Casey said that after Ms. Graves passed away, everything became hers. She consulted an attorney immediately after Ms. Graves passed away. He mentioned inheritance tax, but she assumed it would only be a few thousand dollars.
In response to a question from Representative Rand, Mr. Meng said there are an average of 4,000 inheritance tax returns filed each year. The average liability per return is about $10,000.
In response to a question from Representative Couch, Mr. Meng said he has not reviewed the case and confidentially would prevent discussion anyway.
Representative Couch commented that an unmined minerals tax is being imposed on people by the state on land whether it is being used or not.
In response to a question from Representative Simpson, Ms. Benton said that the state would not have a lien on the property in this case. The tax has been paid to the state. Ms. Casey is repaying a bank loan.
Representative Meade commented that inheritance tax and intangible property tax are the most unfair taxes. He hopes this is included when tax reform is brought before the General Assembly. Tax reform will not work as long as benefits are going to able bodied people.
Representative Mills adjourned the meeting at 1:55 pm.