Kentucky fails to meet criteria to cut income tax again, budget director says
Kentucky has failed to meet the required fiscal triggers to further lower the state income tax, the Office of the State Budget Director said in a recent letter to lawmakers.
The Republican-controlled Kentucky General Assembly passed House Bill 8 in 2022, which set two parameters required to gradually reduce the personal income tax.
But State Budget Director John Hicks’ letter said only one of the two conditions had been met.
The state did have a balance in the Budget Reserve Trust Fund — often called the rainy day fund — at the end of a fiscal year that is at least 10% of the general fund revenue.
However, House Bill 8 also required state general fund revenues to exceed appropriations and the cost of a 1% reduction in the state income tax. In this regard, the state is almost $435 million short.
Co-chair of the Interim Joint Committee on Appropriations and Revenue, Sen. Chris McDaniel, R-Ryland Heights, said the bill is working “precisely as intended.”
“By December 2024, income tax reductions in 2023 and 2024 will have saved taxpayers $1.8 billion,” McDaniel said in a statement Thursday afternoon. “Naysayers have often criticized comprehensive tax reform and the Kentucky General Assembly’s responsible lowering of working Kentuckians’ income taxes. However, this development is evidence we appropriately weighed the importance of lowering taxes with the need for critical government functions such as education, corrections, and more.”
Likewise, McDaniel’s counterpart in the House, Rep. Jason Petrie, R-Elkton, said the bill was “methodical, with conditions designed to exercise an abundance of caution and ensure that we are successful in eliminating the tax without endangering necessary government services.”
“And, the plan is working,” he said. “While several factors contributed to conditions not being met for a third consecutive cut in January 2025, the fiscal year-end report evidenced healthy revenue growth over prior years, moderated spending with the exception of addressing historical flooding in eastern Kentucky, a budget reserve at an historically high level and unprecedented high investment income from the reserve, which all point toward promising conditions for a next cut to the individual income tax in 2026.”
Petrie added that Kentuckians will see another already schedule cut in January 2024, and “we are still on track to eliminate the tax.”
Gov. Andy Beshear, a Democrat, vetoed House Bill 8 last year, saying it would “threaten Kentucky’s future economic security.” The legislature overrode the veto of the bill, which also lowered the tax rate from 5% to 4.5%.
Lawmakers passed House Bill 1 this year, which again lowered the rate, this time from 4.5% to 4%. Breaking with most of his fellow Democrats, Beshear signed the bill.
The governor, who is seeking re-election this year, said at the time he had concerns about “long-term repercussions for potentially funding state services,” but appreciated the bill would “put at least a couple hundred dollars in the pockets of most Kentuckians.”
“Things are tough out there. Inflation is real, and while gas prices have come down, your grocery bill is still way too high,” he said. “While this issue is temporary, it’s still going to last for some time in the foreseeable future and our people need relief.”
Speaking in the Capitol Rotunda at a weekly news conference Thursday, Beshear said Kentuckians shouldn’t worry about the trigger not being met because the commonwealth has a “booming economy.”
“What the legislature tried to do was set up a responsible method for determining when to take — they’re not incremental steps, they’re real steps — in reducing income tax,” Beshear said of the 2022 bill he vetoed. “Now they may revisit that (in the 2024 General Assembly), but they certainly tried to put together what they believe was a responsible framework, and our job is simply to report to them where that is.”
While he wants to reduce everyone’s tax burden, Beshear said “we have to make sure that we are also responsible.”
Attorney General Daniel Cameron, Beshear’s opponent in the Nov. 7 general election, has been vocal about his support for eliminating the income tax, including at a press event his campaign hosted Wednesday.
“I will be the governor who eliminates the income tax,” he said. He later added it was important to do so “as quickly as we possibly can.”
The Herald-Leader followed up with the Cameron campaign via email and in person Thursday to ask what triggers, if any, he’d want to use to lower the income tax. Cameron did not provide specifics and instead reiterated his desire to get to 0% as fast as possible.
“Well, that’s what I would work with our legislature on, and again, my bottom line is to get zero as quickly as we possibly can,” Cameron said when asked about possibly changing the triggers.
The Kentucky Center for Economic Policy, a Berea-based research organization, said the state didn’t hit these thresholds “despite an all-time low unemployment rate and high inflation, both of which drive up total tax receipts.”
“Failing to meet the trigger at a time when it’s easiest to do so because of national economic conditions should send a clear message,” Executive Director Jason Bailey said. “It’s time to put a halt to further cuts and focus on the education, health and infrastructure investments communities must have in order to thrive.”
Politics reporter Austin Horn contributed to this report.
This story was originally published August 31, 2023 at 11:43 AM.
