House GOP tax plan would cost Kentucky’s budget $900 million, state analysis shows
The sweeping tax changes sought by House Republicans would punch a $900 million hole in Kentucky’s roughly $14 billion General Fund, according to a fiscal note that was released to the public only after the House approved the plan last Friday.
House Bill 8, now in the hands of the Senate, gradually would eliminate the state income tax while broadening the state’s 6 percent sales tax to several dozen additional items, including professional photography, personal financial planning, camp tuition and household moving.
But those trade-offs are nowhere near equal, according to the fiscal note, which is a cost-benefit analysis prepared by legislative staffers. Kentucky would lose far more money than it gets.
In Fiscal Year 2023, when the bill is supposed to take effect, the state would see a $530 million loss as the income tax drops from 5 percent to 4 percent and a gain of $57.8 million from an expanded sales tax. With assorted other new fees and changes in the bill, Kentucky would see a net revenue loss of $463.2 million.
The next year, 2024, the net revenue loss would reach $901.7 million. For context, that’s roughly as much as Kentucky’s general fund is providing to the state’s nine public universities this year.
And the loss actually would be worse than that.
The legislative staffers prepared their fiscal note for the original version of the bill. In the rewritten committee substitute the House passed last week, at least one item was dropped from the sales tax expansion — advertising, as a result of lobbying by the Kentucky Broadcasters Association and Kentucky Press Association.
The $50 million a year that the original version of the bill would have collected from advertising was its single-largest new revenue source, said Jason Bailey, executive director of the Kentucky Center for Economic Policy in Berea.
“HB 8 would blast a big and growing hole in our budget with no way to pay for it,” Bailey said. “The other shoe will drop on this bill in massive budget cuts, big increases in the taxes everyday Kentuckians pay, or both.”
The bill’s sponsor, Rep. Jason Petrie, R-Elkton, did not return a call seeking comment Tuesday.
However, in a prepared statement, Petrie said the House GOP relied on a conservative sales tax revenue estimate from economists on the state’s Consensus Forecasting Group while crafting the bill. As a result, he said, lawmakers believe that revenue will continue to grow in coming years, even under the new tax structure.
“We remain confident that the state will see a greater benefit from eliminating personal income tax completely as Kentucky moves from a tax structure that penalizes productivity to one that encourages growth by allowing Kentuckians to keep more of their hard-earned money,” Petrie said.
“There’s a lot of truth to the old adage that if you want something less you tax it more,” he said.
Under the bill, the state income tax would drop from 5 percent to 4 percent next Jan. 1.
The income tax rate would continue to drop by 0.5 percent increments over coming years if the General Fund hit certain “triggers.” For example, at $14.5 billion, the tax rate would drop to 3.5 percent, and at $15.5 billion, it would drop to 3 percent, and so on, reaching 0 at $21.5 billion.
The General Fund collected $12.8 billion in fiscal year 2021, but it’s on a path to exceed $13.79 billion this year and $14 billion in fiscal year 2023, according to the state budget office.
Critics of House Bill 8 have argued that Kentucky could be repeating the infamous “Kansas Experiment,” when Kansas enacted deep state income tax cuts a decade ago in order to spur economic growth. Instead, the state government was left starved for necessary revenue, leading to cuts in services and downgrades in the state’s bond ratings. The Kansas legislature reversed course a few years later.
The bill’s supporters say the triggers written into it would prevent state revenue from sinking to dangerous levels because additional income tax cuts could not take effect until the General Fund already was growing. They predict that lower income tax rates will attract more employers and fuel the state’s economy.
The state is expected to close this fiscal year June 30 with a rare $1.9 billion surplus, fueled in part by federal pandemic relief spending. But there are different plans on the table for how to spend some or all of that money, including a one-time income tax rebate and a temporary sales tax reduction.
This story was originally published March 8, 2022 at 11:35 AM.
