Gov. Patton announces additional vetoes to budget bill

For Immediate Release
March 20, 2003
Contact: Rusty Cheuvront or Terry Sebastian (502) 564-2611

Gov. Patton announces additional vetoes to budget bill

FRANKFORT, Ky. - Governor Patton announced today that he plans to exercise his constitutional authority to veto additional portions of House Bill 269, the budget bill. Veto messages from the Governor will be filed today with the Secretary of State and delivered to the General Assembly regarding the following budget bill provisions:

-- Lines 25 and 26 on page 44 of HB 269 will be vetoed. This provision requires the Kentucky Housing Corporation to match $3 million in general fund appropriations in fiscal year 2003-2004 to the affordable housing trust fund with funds from the housing assistance fund. The Corporation, historically, has matched a $200,000 general fund appropriation to the affordable housing trust fund with money from the housing assistance fund and will continue to do so if this veto is sustained.

The other demands, however, being placed upon that fund leave it incapable of making a $3 million dollar match without severely impacting its ability to provide funding for numerous non-profit housing corporations in Kentucky, currently funded in the amount of $2.5 million as well as other worth while housing assistance programs supported by that fund.

-- Lines 14 through 16 on page 198 of HB 269 will be vetoed. This provision relates to the employer contribution rate for the Kentucky Employees Retirement System and provides that the “employer contribution rates established by KRS 61.565 shall be paid by employers who pay employer contributions with funding sources other than the general fund.”

This provision is in direct violation of federal law regarding the use of federal funds for state governments and exposes the state to a demand by the federal government to repay to it the excess contributions, over and above those charged for general fund employees. This amounts to approximately $4.2 million that would have to be recouped from the general fund. In addition, this is an unbudgeted mandate for agencies whose payroll is supported in whole or in part by fund sources other than the state general fund and federal funds and is unnecessary.

-- Lines 8 through 14 on page 206 of HB 269 will be vetoed. These lines prohibit specified classes of state employees from accepting any “KRS 18A classified position” in state government even if otherwise qualified. This language constitutes an arbitrary disqualification of state employees from accepting 18A classified positions and may be actionable under federal law, which could expose the Commonwealth to the payment of punitive damages as well as back pay and attorney fees. This veto has been requested by legislative leadership, as the conference committee had voted to delete this language, but it was inadvertently left in the bill.

-- Lines 11 through 12 on page 210 of HB 269 will be vetoed. This language limits the fiscal flexibility necessary for administrators to reduce expenditures in order to live within the fiscal constraints imposed by the virtually across the board funding reductions and flat line funding mandated in HB 269. The language is ambiguous and may be construed to restrict managerial flexibility and therefore contradicts other portions of HB 269 that expressly provide the flexibility that is absolutely essential in this period of fiscal constraint. Deleting these lines will provide that essential flexibility.

-- Lines 8 through 11 on page 275 of HB 269 will be vetoed. These lines, after appropriating zero dollars to the Environmental Quality Commission on page 60 of the bill, indicate that $253,700 appropriated elsewhere to the Natural Resources and Environmental Protection Cabinet is to be used to support the personnel and operating costs of the Commission. The Cabinet has not been appropriated any funds for this purpose and would have to curtail important environmental enforcement programs to divert this money to the Commission.

-- Lines 12 through 16 on page 296 of HB 269 will be vetoed. These lines legislatively mandate that otherwise illegal and unauthorized access points to the state’s highway system be granted without consideration being given to the safety of the motoring public and not sound public policy. There are policies and engineering practices in place to properly address the manner in which to access private property from the state’s highways in a manner that does not create unnecessary traffic hazards.

- 30 -

Note: For a copy of the veto messages: http://gov.state.ky.us/pressreleases/2003/vetostatements.htm.

STATEMENT FROM GOVERNOR PATTON
ON CORPORATE TAXATION IN KENTUCKY
MARCH 20, 2003

The Illinois Tool Works (ITW) court decision is causing many major corporations in Kentucky serious concern. This issue highlights the irrational, unfair, and illogical way we tax businesses in Kentucky. This is a problem which should be addressed but only in concert with the closing of several other loopholes in our business tax code.

Kentucky and most other states have long-established policies of corporate taxation. However, several loopholes in the Kentucky tax code have been opened up over the years by seemingly insignificant changes that have turned out to be major. Among these loopholes is the ability to use various other business forms (LLPs, LLCs and LPs) which limit the liability of the owners just as corporations do, the purpose being to reduce or eliminate their corporate tax liability.

The following changes are needed to eliminate some of the loopholes which are being used to legally avoid paying corporate taxes in Kentucky. The administration welcomes the discussion of others.

1. Reverse the ITW decision by extending the preferential calculation given to Kentucky companies to out-of-state companies. This loophole has been estimated by some business interests to be as much as $150 million of revenue which should have been collected and will be collected if the ITW decision is not reversed.

2. Eliminate the deduction for borrowed money to finance inventory when calculating the Corporation License Tax.

3. Extend the Corporation License Tax to all other limited liability business forms except Limited Liability Partnerships providing professional services.

4. Apportion the income of multi-state, non-corporate business forms using the same three-factor formula used by corporations. (25 percent based on the percent of their Kentucky payroll, 25 percent based on their property in Kentucky and 50 percent based on their sales in Kentucky, all compared to the totals for the company.)

5. Require related corporations and their affiliates or subsidiary companies to file consolidated income tax returns. Large companies often choose to operate with many separate legal entities. Kentucky allows the parent company to choose to have its subsidiaries taxed as separate entities or consolidated into one return. This may allow a company to shift profits earned in Kentucky to states where they would owe no taxes on that income because it was not earned in that state. We should eliminate this option, requiring each company to file only a consolidated return.

6. Do not allow companies to get a refund of taxes due to net operating loss carry-backs. Allow losses to be carried forward and deducted from future income.

7. Adopt a “doing business” standard for Kentucky business nexus.

8. Disallow in the apportionment formula sales in states in which a company would owe no taxes. Some Kentucky corporations have sales into other states on which they owe no corporate income tax. For Kentucky business, those sales should be considered Kentucky sales for apportionment purposes since these sales are not taxed anywhere else.

The loss of corporate support for the General Fund over the past 12 years has been about $300 million. The ITW decision has recovered about half of that. What it has not done is stop the decline in corporate support which will continue if these loopholes are not closed. As best the experts in the Revenue Cabinet and GOPM can determine, these recommended changes will stop the loss of corporate support for the General Fund and allow it to grow relatively consistent with other revenue of the General Fund.

This proposal could be designed to be a revenue neutral solution to a major problem with the Kentucky tax code and would end the debate about corporations paying their fair share.