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Legislature hopes ‘sin’ taxes will aid budget

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State adds package-alcohol sales tax, boosts cigarette taxes hoping to cut $450M shortfall

By Sharon Graves

The Kentucky House of Representatives and Senate came together last week in cooperation rarely seen in preceding years to pass monumental legislation taxing two of Kentucky’s signature products.

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House Bill 144 allows taxes on a pack of cigarettes to be increased April 1 by 31 cents and alcohol will lose its exemption that kept the state from collecting sales tax at the retail level. Other tobacco products such as snuff, pipe tobacco and chewing tobacco had their tax rates doubled.

The bill also allows for a one-time floor tax, meaning if it’s on the retailer’s shelves on March 31, they will be taxed on it. Consequently, many retailers could empty their cigarette bins leading up to the March 31 date to avoid paying that tax.

Passage of HB144 was fraught with heated committee meetings, impassioned pleas on the House floor, sign-toting protestors, a near-blockade of the capital driveway by beer distributor trucks, arm twisting and threats of job losses, but when the dust cleared on Wednesday the vote was 66 yea and 34 nay. The bill then went to the Senate floor on Friday and also passed 24 to 12.

Up until now, if you walked into any store to purchase any type of packaged alcohol you did not pay sales tax on the purchase. This bill changes that practice and could add $52.2 million to Kentucky’s coffers by the end of the fiscal year at the end of June. In fiscal year 2010 Kentucky could net up to $160 million from this bill alone. Kentucky is facing a $456 million deficit and many see this as one way to help balance the budget.

Many others see it as giving Kentucky alcohol the highest tax rate in the nation and one of Kentucky’s signature products, namely bourbon could be adversely impacted.

On Wednesday, when the bill passed in the House, protestors holding signs in the capital rotunda stated that a yes vote would make Kentucky liquor the highest taxed liquor in the nation. The taxing these protestors were referring to is levied at the wholesaler and distributor level, and by the drink, but the purchasing public has never paid sales tax on packaged product.

Representative Rick Rand, D-Bedford, was named chair of the powerful Appropriations and Revenue Committee in January and has been responsible to work with his committee and the Kentucky Senate to get this bill through the legislature.  All revenue bills must originate in the House according to the Kentucky Constitution.

Co-sponsor Representative Rand and Senator Ernie Harris, R- Crestwood, represent Carroll County in the Kentucky General Assembly and both men admitted they were somewhat torn on the bill, but each did vote to pass it.

“They’re [alcohol and tobacco] an easy target,” Harris said. “I’m particularly conflicted over the alcohol tax, because it is one of our signature industries. I would love to have a broad-based tax that would do more than just attack these two sin taxes. It could be an increase in sales tax, but there’s no support for that.”

In Rand’s office is a photograph of him as a child and his father standing in a tobacco field. “I grew up on a tobacco farm, just like everybody that I know,” Rand said. “But the bottom line is that smoking is a big [financial] burden to us. About a half a billion dollars in the cost of our Medicaid system is directly attributed to smoking.”

Small family wineries are exempt from the tax increase until they produce up to 50,000 gallons, according to Rand.

Additionally, the federal government also passed a cigarette tax increase, amounting to 60 cents per pack and it will also take effect on April 1, hiking cigarette tax levels in Kentucky to 91 cents per pack.

Hopefully a tax increase of that size will be a deterrent to teenagers to never smoke, Rand said. “That’s really where we need to make a difference, if we can have a generation that doesn’t start smoking.”

“If that’s all we can do to mend this hole in the budget, then we have to do it,” Harris said.

“We have a responsibility to educate and protect our people,” Harris said. “Eighty percent of our budget is tied up in education, healthcare through Medicaid, and corrections. We have a hole we haven’t seen in generations.”

“Medicaid is 13 percent of our budget,” Harris said, “and growing. It’s not bankrupting us now, but it will in 15 to 20 years.”