(The Center Square) – Republicans in the Kentucky House of Representatives on Friday introduced a long-anticipated tax modernization bill that would seek to phase out the state’s personal income tax over several years.
house bill 8 would lower the income tax rate by a percentage point to 4% starting on Jan. 1. From there, future reductions would kick in once the state general fund receipts hit certain thresholds.
If those receipts hit $13.75 billion, the tax rate would drop to 3.5% for the following year, and the rate would fall 3% after receipts top $14.5 billion.
From there, the state would reduce the rate by a half-percentage point after the receipts increase by $1 billion. That would eliminate the personal income tax once receipts hit $20.5 billion.
For perspective, Kentucky reported general fund receipts of $12.8 billion for the 2020-21 fiscal year, a 10.9% increase from the previous cycle. If receipts continued to grow at such a rate, the personal income tax would be eliminated on Jan. 1, 2027.
The bill does not include any language that would increase the income tax should general fund receipts fall below a threshold.
Primary sponsor State Rep. Jason Petrie, R-Elkton, and other sponsors said the immediate 1% rate cut would give Kentucky taxpayers about $1 billion more to spend or save. They added that the bill would serve as an incentive to get more residents back into the workforce. It would also grow the state’s employment base by helping to attract more people from other states.
“We have been very open about our goal to let people keep more of their hard-earned money rather than collecting it for the government to determine how to spend,” said Petrie, who chairs the House Appropriations and Revenue Committee. “Population growth is a necessary component of long-term growth in Kentucky and is affected substantially by our tax structure.”
As part of the offset to the personal income tax reduction, the bill calls for the state’s 6% sales tax to be included for several services. That list includes cosmetic surgeries, entertainment venue rentals, advertising and marketing services and temporary residential vacation rentals like Airbnb.
Other proposed offsets to cut the income tax include a reclamation fee for batteries from electronic and hybrid vehicles as well as a tax to use fee-for-service vehicle charging stations.
The bill would not adjust the corporate income tax or the limited liability tax, nor would it expand the sales tax to cover groceries.
Lawmakers were expected to bring up tax modernization in the second half of the 60-day General Assembly session, and the House deadline to submit new bills is next Tuesday. Already, House lawmakers have passed their version of the two-year state budget, which is currently being reviewed by the state Senate.
State Rep. Brandon Reed, a Hodgenville Republican who co-sponsors the bill and served as the House appropriations committee vice-chair, said the House budget proposal set aside funds to modernize the state’s tax code.
“As a result, we have a once in a lifetime opportunity to make long-term, generational change,” he said.
the Kentucky Chamber of Commerce has pushed for comprehensive tax reform that it says is needed to make Kentucky more competitive not just regionally but nationally. The business organization noted that other states with no personal income tax, like Florida, Texas, and Tennessee, have seen their economies and populations grow faster.
Kate Shanks, the chamber’s senior vice president for public affairs, said in a statement that the group was “encouraged” by Friday’s proposal and will review the legislation.
Critics, though, view the proposal as a giveaway to the state’s wealthiest individuals and said that adding the sales tax to select services would not offset the reductions. That could devastate the state’s public school system, which receives more than 40% of the general fund dollars, according to an analysis by Jason Bailey, executive director and founder for the Kentucky Center for Economic Policy.
Bailey’s also skeptical about claims lowering tax rates will lead to more people calling the Bluegrass State home.
“The few states without income taxes struggled to fund public services and have much bigger tourism and natural resource extraction economies than Kentucky does,” he wrote. “There will be serious pressure to raise the sales tax rate and apply it to items like groceries, medicine and utilities.”
The proposal comes as the state is coming off a record year for economic development, buoyed by the nearly $6 billion electronic vehicle battery plant Ford plans to build in Glendale.
A report by Bloomberg earlier this month Kentucky showed was in a four-way tie for the seventh-best economic recovery in the US over the past year, with a 6.3% improvement. However, neighbors Tennessee (7.1%) and Indiana (7.7%) still outpaced Kentucky.
Indiana, which has a 3.2% income tax, is another state GOP lawmakers have said should serve as a role model for Kentucky’s tax reform plans.
The bill will go before Petrie’s committee.