Tax Modernization Implementation of House Bills 267 (Budget) and 272 from the 2005 General Assembly Presentation to: Commonwealth Technology Council February 23, 2006

What is Tax Modernization?

Goals of Tax Modernization  Encourage rather than impede the success of business;  Make changes that are revenue neutral with elements that will spur economic growth in the future; and  Export some of the tax burden to nonresidents.

Tax Modernization: Not New, Not Easy  1995: Jones Report  : Multiple attempts by the Patton administration  2004: First attempt by Governor Fletcher  And then………

Tax Modernization 2005 House Bill 272 Signed by Governor Fletcher on March 18, 2005

What is Tax Modernization? Tax Modernization represents the Largest Change to the Commonwealth’s Tax Structure since  1936 Changes Included:  Sales tax repealed and replaced with enactment of individual and corporate income taxes; and  Taxes imposed on cigarettes, beer and alcohol (sin taxes) for the first time in Kentucky.

Taxes Impacted  New Taxes Imposed  Transient room tax  Telecommunications  Other tobacco products  Existing Taxes Changed  Cigarette  Alcoholic beverage  Health care provider  Utility gross receipts license tax  Individual income tax  Property tax  Corporation tax  Sales and Use Tax  Equine breeders fund  Streamlined sales tax

Revenue Neutral To pay for all these changes, Kentucky taxpayers shouldn't have to dig any deeper into their pockets. The tax law changes were established to be “revenue neutral,” which means that the revenue raised through new taxes should be equal to the amount of tax reductions and new credits.

Be Careful What You Ask For… Tax reform was long overdue, but it meant….  New computer software would have to be developed;  Hundreds of computer programs would have to changed in a short period of time; and  New forms and procedures would have to be developed.

So Why are We Talking about Taxes in a Meeting about Technology?

Time is Not on Our Side…. The system changes were the equivalent of three years of work being compressed into nine months of time. To Misquote Mick and the Boys:  Time was Not On Our Side…..

Innovation By Timelines Staff within COT and DOR had to modify their normal processes and adopt innovative new approaches for the massive effort. These included:  Creative structuring of the various projects into phases;  Consolidating testing by applications rather than projects;  Working in shifts when possible; and  Changing computer programs only once even if modifications were necessary for multiple tax projects.

Current DOR System Infrastructure

Tax Modernization System Impacts  91 DOR Systems were changed or created under the Tax Modernization Project.  Over 100,000 COT Man-Hours were spent designing, updating and creating the Tax Modernization Project.  Over 100,000 DOR Man-Hours were spent designing and testing the Tax Modernization Project.

What Could Have Happened…. Without COT and DOR Cooperative and Combined Efforts

With Cooperative Efforts… Tax Modernization Implementation Ran Smoothly Tax Modernization Implementation Tax Mod Pop. 2006

DOR and COT Teamwork "Implementing the Tax Modernization project has been quite a challenge for both Revenue and COT, but our staffs have done a remarkable job. I'm extremely proud of the teamwork, dedication and professionalism that state employees from both agencies have shown in getting the job done." - Commissioner Mike Inman (COT)

DOR and COT Teamwork “Tax Modernization was truly the most comprehensive tax change since the Department of Revenue was established. While all the tasks are not yet completed, the fact that tax filing season is running smoothly testifies to the dedication and professionalism of DOR and COT staffs.” - Commissioner Mark Treesh (DOR)

What Does the Future Hold for DOR and the Tax Systems?

Comprehensive Tax System  The Department of Revenue has requested funding in the Current Budget for a Comprehensive Tax System.  Project costs are estimated at $35 Million and include the replacement of all current DOR mainframe and stand alone systems.  RFI will be released in coming days, with the RFP scheduled for release by the end of April.

Questions

Bradley W. Thomas, Executive Assistant Department of Revenue Office of the Commissioner