FRANKFORT, Ky. (WDRB) – Kentucky’s Republican-controlled legislature introduced and approved a sweeping tax reform bill over about eight hours on Monday, part of a plan to generate an estimated $480 million during the next two years.

The measure would lower corporate and individual tax rates but add the state’s 6 percent sales tax to a host of services now exempt, such as lawn care, janitorial, dry cleaning and veterinary care for small pets. The bill adds a 50-cent per-pack tax on cigarettes.

While supporters said the changes make Kentucky more business-friendly and return money to workers’ pockets, Democrats largely assailed the plan as “corporate welfare” that attempts to balance the state budget on the poor and accused Republicans of excluding them from the negotiations.

House Bill 366 also brought a rebuke from conservative anti-tax crusader Grover Norquist and the Kentucky chapter of the limited government group Americans for Prosperity, which typically aligns with right-leaning policies.

Gov. Matt Bevin, who has suggested the need for a special legislative session solely for tax reform, broke with his fellow Republicans and said in a statement that the tax and companion budget measure may not meet “basic standards of fiscal responsibility.”

With no committee hearings or public input from those affected by the proposed changes to the state’s tax code, the bill passed the Senate on a 20-18 vote, then cleared the House later in the afternoon by a 51-44 vote.

An accompanying budget bill that uses the new money would restore cuts in many public services and boost basic K-12 education spending. It was debated by the House for about an hour Monday night before passing  a 59-36 vote. It now moves on to Bevin's desk, though the governor publicly criticized the bill Monday afternoon.

Sales tax would be expanded to services

Kentucky's sales tax currently applies only to physical goods. So, consumers pay the 6 percent tax if they buy a lawnmower at the hardware store, but do not pay the tax if they hire a lawn service. 

Experts have long recommended expanding the sales tax to cover more ground.

In 2013, the "blue ribbon" tax reform commission convened by Democratic Gov. Steve Beshear said the tax should be extended to "selected services."

The Republican plan unveiled Monday would change the state’s corporate income tax to a flat 5 percent instead of its current range of 4 to 6 percent. The state’s individual income tax would also change to 5 percent instead of ranging from 2 to 6 percent depending on the amount of income.

Retirees would see higher state taxes on their income. Kentucky currently exempts the first $41,110 of retiree income – whether from pensions, 401-K accounts or IRAs – from state taxes, but under the plan, the exemption would be lowered to $31,110.

The state cigarette tax would be raised to $1.10 per pack, up from 60 cents currently. Backers of a $1 per-pack increase have said a 50-cent hike wouldn't have an effect on smoking rates, as coupons and other discounts could blunt the impact on smokers.

Beshear's blue ribbon panel also recommended reducing the tax break on retiree income and increasing the per-pack cigarette tax.

Senate budget chairman Chris McDaniel, a Republican from Taylor Mill, said the tax changes "make us more competitive for business and make Kentucky a more tax friendly state in which to reside."

But Democrats blasted the plan as a giveaway to wealthy residents and corporations. They also decried the process in which the bill was negotiated in private before being unveiled and scheduled for immediate votes on Monday.

"This bill shifts the burden to working families and people on a fixed income to cut corporate taxes," said Sen. Ray Jones of Pikeville, the Democratic floor leader.

People who need to replace a heat pump in the depths of winter or put a new transmission in a vehicle will bear the brunt of the changes, he said.

New money restores cuts to education, other programs

The new revenues generated in the lawmakers’ proposal would help the state balance a two-year spending plan that restores some previous cuts.

The spending deal revealed Monday would increase the amount of funding from the state’s main K-12 education formula known as SEEK, to $4,000 per pupil in each of the next two years.

It also reverses a proposal to cut funding from Western Kentucky University’s Mesonet program, which provides weather monitoring across the state. Instead, the program would receive $1.5 million over the two-year budget period.

Among other things, the budget proposal adds $11.1 million annually for increases in the base pay of state social workers – or raises of up to 10 percent. 

The lawmakers also agreed to spend $6.2 million a year from the general fund to restore Gov. Matt Bevin’s proposed cuts to Kentucky State Police and adds $2 million over the budget to boost salaries of forensic laboratory technicians. 

Also restored were cuts sought for the Kentucky Department of Veterans’ Affairs. The budget panel added $1.19 million a year for the agency and included language that authorizes a new veterans center in Bowling Green once federal funds are available. 

The tax and budget bills drew criticism from policy groups at both ends of the political spectrum.

"It is disgusting that even with large Republican majorities in both chambers, lawmakers chose to continue  unchecked spending and fund it with massive new tax increases," said Andrew V. McNeill, director of Americans for Prosperity-Kentucky, a group that favors limited government and low taxes. "This proposal is a gift for special interests and a slap in the face to hardworking Kentuckians."

The progressive Kentucky Center for Economic Policy, meanwhile, said the tax bill is too generous to corporations and wealthy residents and sets the state up for problems down the road by relying too much on the declining cigarette tax base.

"Because income and corporate taxes ask more of the wealthy and corporations, these changes mean high-income people and businesses will contribute a smaller share to Kentucky’s budget needs," KCEP director Jason Bailey wrote in a blog post.

Here is a summary of the proposed tax changes released by Republican Senate staff on Monday:

The Associated Press and reporter Marcus Green contributed to this report. Copyright 2018 by WDRB News. All rights reserved.