‘Refundable’ tax credits wrong policy for boosting signature industries

Editor’s note: The Bluegrass Beacon is a weekly syndicated newspaper column posted on the Bluegrass Institute’s website after appearing in publications statewide.

Like a lot of Kentuckians, I’m proud of our state’s association with bourbon.

The Bourbon Trail, the mystique of Pappy Van Winkle, the Bourbon & Beyond festival - which brought over 140,000 people to Louisville last weekend - are a few examples of how our cultural touchstone has become a unique identifier in the minds of many.

Still, my warning radar goes on high alert when I hear Frankfort touting ideas as necessary to support Kentucky’s “signature industries.” Be on the lookout for legislators gearing up to deliver favorable treatment to the well-connected.

When faced with a Kentucky Supreme Court decision that said historic racing machines were illegal, the thoroughbred industry and racetracks got the General Assembly to snap to attention and retroactively validate the wagering parlors that had sprung up around the state. But, locking in legal protection for their lucrative revenue stream wasn’t enough.

They also joined an effort to outlaw “gray machines.” Whether these machines are “games of skill” or “games of chance” doesn’t matter; they’re competition for consumer’s entertainment dollar.

Personally, I’d rather not see a proliferation of gray machines at gas stations throughout Kentucky. My free-market principles, however, are offended when powerful interests throw their weight around to shut down smaller upstarts.

To be clear, the bourbon industry isn’t seeking to stifle competition. Instead, according to the Lexington Herald-Leader, a special legislative task force is discussing how to expand upon a special tax treatment granted to distillers in 2014. A recent article reported, “distillers say (their) tax break has been washed out by another, broader tax break and they are looking to Frankfort for a fix.”

The detail that sent up my red flag was the Kentucky Distillers Association asking that their members’ tax credits be made “refundable.” With refundable tax credits, companies not only lower their tax liability but potentially get a big check from the state treasury (paid for, of course, by you and me).

Without a complete grasp of how refundable tax credits work, most Republicans tend to be supportive, believing they align with their low tax philosophy. These refunds, however, aren’t like those that individual taxpayers get when they’ve overpaid on their taxes.

To illustrate, assume a distiller has $100,000 in tax liability at the end of the year and has accumulated $500,000 in refundable tax credits. Whereas traditional tax incentives would allow a company to use their credits to cut their tax bill to $0, refundable tax credits allow that and entitle the company to a $400,000 payment from the state.

Refundable tax credits are an appropriation of public money through the tax code. Without an item in the budget labeled “Appropriation for Private Industry,” these subsidies escape scrutiny. Make no mistake, this is by design.

Advocates on the task force will point to the jobs and economic growth the state realizes from having the industry here. Still, it’s a sad truth that certain legislative leaders are more responsive to powerful lobbies than the average Kentuckian.

How, exactly, a family of four in Middlesboro or Mayfield benefits from a concentration of distilleries around Bardstown isn’t likely to be asked by the task force – because there isn’t a good answer. It will be left up to the rank-and-file members to push back against a transfer from their constituents’ pocketbooks to corporate bottom lines.

Kentuckians want our signature industries to succeed. A handout from the government isn’t the right way to go about it.

Andrew McNeill is the former Kentucky deputy state budget director and a visiting policy fellow at the Bluegrass Institute for Public Policy Solutions. He can be reached at amcneill@freedomkentucky.com.