Taxing financial planning services is not the answer

Every day, state and federal legislators consider legislation or regulations that impact financial planners and consumers of financial services. While many of these policies can elevate financial planners and protect investors and savers, some do not. That’s why it’s critical that the financial planning community and organizations committed to serving the needs of financial planners advocate for policies that strengthen the profession while fighting policies that stand in the way of building a thriving profession.

The Financial Planning Association has long been committed to ensuring that the voices of our members, and all CFP professionals, are heard by policymakers when considering laws or regulations.

The state of Kentucky is currently considering legislation that could repeal your state income tax and replace it with a tax on services, including “personal financial planning services” and “personal investment management services.” If passed, the legislation could significantly harm the way Kentucky residents save, plan for retirement, invest and prepare for their financial future.

Taxing personal financial planning services would increase the cost of such services, which could be passed on to clients, which could lead Kentucky investors to seek financial planning services from professionals in other states where these taxes do not exist. It would also impose an administrative burden on Kentucky financial planning firms and create an economic disadvantage for businesses moving to the state.

Other states have considered taxing professional services such as financial advice and investment management. If this legislation passes the Kentucky Legislature and is signed into law by Governor Andy Beshear, other states may consider similar legislation in the future.

Kentucky isn’t the first state to try to tax professional services, and it won’t be the last.

In 1987, Florida taxed professional services and, within six months, repealed the policy due to concerns that Florida was pitting its in-state businesses against out-of-state competition. In 1990, Massachusetts enacted a business services tax, but the law was repealed just two days after it went into effect. In 2007, Michigan enacted a sweeping utility tax, which was finally repealed just 17 hours after it was passed. After the failed Massachusetts attempt in 1990, they thought they would try again in 2013. It was a more restricted version that only taxed computer software and design services. Massachusetts repealed it again just two months after it was enacted.

Not surprisingly, states are moving toward professional tax services. State sales tax bases have decreased over the years, resulting in sales tax rates increasing on average from about 3% to 6%. This is because consumers spend more of their money on services and buy fewer retail goods.

Certainly, eliminating a state’s income tax presents exciting opportunities from a financial planning standpoint. But replacing it with a tax on much-needed financial planning services will hurt financial planners and the clients they serve. That’s why the FPA has hired a lobbyist to have the proposed taxes on these services removed from the bill, and why we’re calling on our Kentucky members and all financial planners in the Bluegrass State to do hear your voice on this critical issue.

While these current efforts are focused on Kentucky and this specific legislation, we are approaching this work with a broader vision. The potential passage of this bill, as currently drafted, could impact our members and financial planners across the country, as it could encourage other states to consider similar legislation.

As we react to what is happening in Kentucky, we believe these outreach efforts will proactively protect our members, their businesses, and customers across the country.

Dennis J. Moore is a volunteer President of the Financial Planning Association and an executive leader with Mercer Advisors in Dallas.

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