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MAY 2005

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Tax Reform Comes
to the Commonwealth

    In March 2005, Gov. Ernie Fletcher signed into law legislation that will reform Kentucky's tax system, including reducing the top corporate income tax rate, currently 8.25 percent, to 7 percent this year and down to 6 percent in 2007. The legislation also eliminates some business tax loopholes, including the exemption for corporations that do business but have no physical presence in the state. Fletcher and legislators viewed this exemption as being unfair to Kentucky companies. The changes are the first comprehensive updating of the state's revenue system in many decades.
      Fletcher says attempts have been made to restructure Kentucky's tax system for more than two decades.
Gov. Ernie Fletcher touts the state's sweeping tax reform as a potential boon for future economic development.
He believes it will make the state more attractive to companies.
      "We made it overall revenue-neutral and got virtually unanimous support out of the General Assembly," Fletcher says. "We will be cutting some expenditures and raising the cigarette tax. That will allow us to reduce other taxes to promote economic growth."
      Kentucky's cigarette tax, previously the lowest in the nation, will rise from 3 to 30 cents per pack while new alcohol taxes will add about 25 cents to the cost of a 12-pack of beer. Part of the increased revenue from the cigarette tax will fund cancer research at the University of Kentucky and the University of Louisville.
      The legislation also provides for tax credits for brownfield development. Fletcher says the state has also added an environmental stewardship incentive as part of an effort to attract hybrid vehicle production to the state.
      "We're now the fourth largest producer of trucks and the third largest of cars," Fletcher says. "We're increasing our effort to get Toyota to place their hybrid manufacturing in Kentucky."
      Toyota officials have said they will pick a North American manufacturing location for hybrids by June.

Kentucky Cabinet for Economic Development

Greater Louisville Inc.

Commerce Lexington

      Fletcher cites the recent grand opening of Belcan Engineering's design center in Lexington as an example of the state's effort to build strong public-private partnerships. Belcan plans on working closely with the University of Kentucky's College of Engineering to develop opportunities for graduates. Belcan will provide engineering for Sikorsky Aircraft, and its staff could grow to 300 depending on Sikorsky winning future U.S. government and international contracts.
      "That's part of our desire to build strong public-private partnerships," Fletcher says. "With the university providing the work force, Belcan will be utilizing students early on, getting engineering expertise at a competitive rate."
      Fletcher believes the state's recently certified Tennessee Valley Authority megasite, a 2,100-acre (850-hectare) parcel in Christian County, near Hopkinsville, becomes more appealing with tax reform in place. Site Selection
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