2013 BR0430HB361SCS/Amendment1

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COMMONWEALTH OF KENTUCKY

STATE FISCAL NOTE STATEMENT

GENERAL ASSEMBLY / LEGISLATIVE RESEARCH COMMISSION
2013 REGULAR SESSION

MEASURE

(X) 2013 BR No. / 430 / (X) / House / Bill No. / 361/SCS1
( ) Resolution No. / (X) Amendment No. / SCA 2
SUBJECT/TITLE / An Act relating to the taxation of tobacco products.
SPONSOR / Senator Ernie Harris

NOTE SUMMARY

Fiscal Analysis: / X / Impact / No Impact / Indeterminable Impact
Level(s) of Impact: / X / State / Local / Federal
Budget Unit(s) Impact
Fund(s) Impact: / X / General / Road / Federal
Restricted Agency (Type) / (Other)

FISCAL SUMMARY

______

Fiscal Estimates / 2012-2013 / 2013-2014 / Future Annual
Rate of Change
Revenues Increase
(Decrease) / ($100,000) / ($800,000) / ($1 million annually)
Expenditures Increase
(Decrease)
Net Effect Positive
(Negative) / ($100,000) / ($800,000) / ($1 million annually)

______

MEASURE'S PURPOSE: The amendment would exclude from individual income tax any amount of discharged indebtedness resulting from the principal residence of the taxpayer.

PROVISION/MECHANICS: In 2007, Congress added a provision to Section 108 of the Internal Revenue Code which would exclude from gross income the discharge (in whole or in part) of indebtedness of the taxpayer related to the qualified principal residence of a taxpayer. Since Kentucky statutes currently reference the IRC in effect on December 31, 2006, and the change was made by Congress after that date, Kentucky currently taxes the discharge of indebtedness related to the principal residence of the taxpayer.

Congress revisits this provision annually to determine whether an extension of the provision is necessary. The American Taxpayer Relief Act of 2012 extended the provision for indebtedness discharged before January 1, 2013, to January 1, 2014. (This latest extension was part of the recent fiscal cliff bill, Pub. L. No. 112-240.) For federal purposes, the provision is set to expire on January 1, 2014. The amendment to HB 361/SCS includes language which would continue the exclusion of income from the discharge of indebtedness even if the federal provision were to expire.

An example of when this income might occur is during a short sale of the taxpayer’s residence. If the taxpayer has a mortgage of $150,000 and the bank and the taxpayer agree to sell the residence for $100,000, then $50,000 of indebtedness is discharged in this transaction. For federal income tax purposes, the $50,000 is exempt from the calculation of gross income. For Kentucky purposes, since the IRC we have adopted does not contain this language, the $50,000 of discharged indebtedness is taxable to that taxpayer.

FISCAL EXPLANATION: Since the provision would exclude income which is currently taxable, there would be a negative fiscal impact to the General Fund. The Department of Revenue does not have specific income amounts related to this specific category of gross income. LRC staff has estimated the fiscal impact using estimates from the Joint Committee on Taxation when Congress enacted and extended the provision. According to data from the National Association of Realtors, Kentucky accounted for 1.43% of existing homes sales in the U.S. in 2010. According to RealtyTrac, pre-foreclosure short sales increased by 4% from 2011 to 2012. Using data from these sources, it is estimated that the negative impact would be approximately $1 million annually, at full implementation.

For income tax purposes, it generally takes three state fiscal years to obtain full implementation. Therefore, in FY 13, only a very small impact would occur (possibly less than $100,000) related to adjustment of estimated tax payments in June. In FY 14, most of the impact (approximately $800,000) related to the first year would be realized as returns are filed in April of 2014. Finally, in FY 15, at full implementation, the $1 million fiscal impact would occur.

DATA SOURCE(S) / LRC staff, U.S. Joint Committee on Taxation data, National Association of Realtors
NOTE NO. / 57 / PREPARER / Jennifer Hays / REVIEW / GMR / DATE / 3-5-13

LRC 2013- BR0430HB361SCS/Amendment1