KY’s personal income tax rate is going down. Here’s how much and why.
Kentucky taxpayers will soon feel the effects of one of Republican legislators’ main priorities: cutting the personal income tax.
As expected, the state hit the triggers necessary to induce a reduction in the state personal income tax from 5% to 4.5%. The decrease will go into effect at the start of next year.
GOP legislators have, with near unanimity, heralded the drop as a positive legislative effort that will encourage business investment, a population influx, and keep more money in the pockets of working Kentuckians. The bill to put Kentucky on a path to no income tax at all, like neighboring Tennessee, was passed this year and allows for the tax rate to drop by 0.5% each year given that the state hits certain triggers and the legislature approves of the decrease.
Those triggers include: actual revenues exceeding expenses plus the dollar value of a 1% drop in income tax and the maintenance of a Budget Reserve Trust Fund (or rainy day fund) equivalent to 10% of the actual revenue drawn in a given fiscal year.
The Budget Reserve Trust Fund recently hit a historic $2.7 billion high, and $200 million was just taken out to fund a flood relief package for Eastern Kentucky. Given the state’s current General Fund revenue, around $14 billion, the Budget Reserve Trust Fund trigger could prevent further personal income tax cuts if it sinks lower than $1.4 billion.
The bill also extended the state’s sales tax to some previously untaxed goods and services. Estimates from GOP House Majority leadership also indicate that the state will drop down to 4% personal income tax by 2024 as well.
The personal income tax is currently the source of about 40% of the state’s tax revenue.
Many Democrats, as well as some outside observers, have warned that the legislation will cause state coffers to shrink to the point of not being able to fund necessary services. They also argue that it’s an imbalanced giveaway to the wealthy, who stand to save much more money than working class Kentuckians due to an across-the-board percentage-based cut.
Jason Bailey, Executive Director of the Kentucky Center for Economic Policy, called it a “budget buster” and said that it was the worst piece of legislation he’s ever seen in 23 years of following Frankfort. He said it created “perverse incentives” for the state, making it prioritize savings and keeping room for future tax cuts over addressing “critical needs,” and could also pressure the state into raising the sales tax on now-untaxed goods or services.
“In effect, these mechanisms make a goal out of failing to invest in Kentucky communities,” Bailey wrote.
Gov. Andy Beshear, in his veto that was later overridden by the legislature, said that it would “threaten Kentucky’s future economic security,” and lamented the new sales taxes it imposed.
Republicans in the legislature argue that the triggers needed to activate tax rate drops will prevent Kentucky from losing needed services like Kansas did when it tried something similar. They also say that consumption-based tax systems make more sense than income-based ones because they consider income taxes to unfairly discourage productivity.
