Taxing financial planning services is not the answer

Every day, state and federal policymakers consider legislation or regulations that impact financial planners and consumers of financial services. While many such policies may elevate the standing of financial planners and protect investors and savers, some do not. That's why it is crucial for the financial planning community and organizations committed to serving the needs of financial planners to advocate for policies that will make the profession stronger while fighting policies that hinder the progress of building a thriving profession.

The Financial Planning Association has long been committed to ensuring policymakers hear our members’ voices, and those of all CFP professionals, when legislation or regulations are being considered.

The state of Kentucky is currently considering legislation that would repeal its 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 may significantly harm the way Kentuckians save, plan for retirement, invest and prepare for their financial futures.

Taxing personal financial planning services would increase the cost of such services, which could be passed onto clients, potentially leading Kentucky investors to seek financial planning services from professionals in other states where these taxes don’t exist. It would also place an administrative burden on Kentucky financial planning businesses and create an economic disadvantage for businesses to move into the state.

Other states have considered the taxation of professional services like financial advice and investment management. If this legislation is passed by the Kentucky Legislature and signed into law by Gov. Andy Beshear, it may potentially lead to other states considering 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In 1987, Florida taxed professional services and, within six months, repealed the policy due to a concern that Florida was pitting its in-state businesses against out-of-state competition. In 1990, Massachusetts enacted taxation of services provided to businesses, but the law was repealed just two days after it was put into effect. In 2007, Michigan enacted a broad tax on services, which was ultimately repealed just 17 hours after passage. After Massachusetts’ failed attempt in 1990, they thought they would try it again in 2013. It was a narrower version that taxed computer software and design services only. Massachusetts again repealed it just two months after being enacted.

It's not surprising that states are moving to tax professional services. State sales tax bases have declined over the years, which has resulted in sales tax rates being increased on average from around 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 interesting opportunities from a financial planning standpoint. But replacing it with a tax on much-needed financial planning services will harm financial planners and the clients they serve. That's why FPA has engaged a lobbyist to have the proposed taxes on these services eliminated from the bill, and why we are calling on our Kentucky members and all financial planners in the Bluegrass State to make their voices heard on this critical issue.

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

While we're being reactive to what is transpiring in Kentucky, we believe these advocacy efforts will proactively protect our members, their businesses, and clients across our nation.

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