Today, the Senate passed legislation to further reduce the income tax from 4.5 to 4%, and the bill will now head back to the House for concurrence before heading to the governor’s desk.
House Bill 1 codifies the cut in House Bill 8 — a bill passed during the 2022 legislative session that seeks to eliminate the income tax over ten years by half percent increments.
All four Northern Kentucky Senators — Sen. John Schickel (R-Union), Sen. Gex Williams (R-Verona), Sen. Shelley Funke Frommeyer (R-Alexandria), and Sen. Chris McDaniel (R-Ryland Heights) — voted in favor of the bill.
The final tally in the Senate was 30-5.
The first cut occurred on Jan. 1, 2023, when the income tax decreased from 5 to 4.5%. The second cut — from 4.5 to 4% — will take place on Jan. 1, 2024, if the governor signs the bill into law or the legislature overrides his potential veto.
If he vetoes the bill, the legislature has more than enough votes to override the governor’s veto — the House’s supermajority is 80 Republicans to 20 Democrats, and the Senate’s is 31-7.
Before the bill reached the floor of the Senate, it swiftly passed the chamber’s appropriations and revenue committee in the morning.
Rep. Brandon Reed (R-Hodgdenvile) presented the bill to the committee, where he outlined the cut to the income tax on Jan. 1, 2024.
Pam Thomas, a senior fellow at the Kentucky Center for Economic Policy, outlined the organization’s argument against the bill when she asked the committee to reconsider the bill.
The Center for Economic Policy said the income tax bill would “blow a hole” in the state’s budget. They argue the state will lose roughly $1.2 billion in revenue, with some revenue expected to be replaced by the bill’s widening of the sales tax base.
“Without the income tax, we wouldn’t have a significant budget reserve trust fund like we have now because the income tax accounted for about 47%,” Thomas said.
Thomas detailed that the positive financial outlook of the state — with strong revenues and a record budget reserve trust fund — is primarily due to the windfalls of COVID-19 Pandemic Emergency money given to states across the county.
Those won’t last, though, according to Thomas.
“Forecasters don’t predict the same growth going forward,” Thomas said.
In December, the Consensus Forecasting Group presented information to the Kentucky Legislature that the surplus for the current fiscal year is stronger than predicted.
The budget surplus for Fiscal Year 2023 is expected to grow about 6.4% from the $945 billion surplus in 2022 to $1.4 billion. This comes after Kentucky recorded a surplus of more than $1.1 billion for fiscal year 2021.
The group predicted a substantial surplus in 2024, as well.
The surpluses are expected to bring the state’s rainy day fund up to over $3 billion at the end of the fiscal year 2023 and nearly $4 billion at the end of the fiscal year 2024. These figures also represent growth rates of 3.4% for the 2023 fiscal year and 1.7% for the fiscal year 2024, the Forecasting Group reported.
The reductions each year depend on money in the balance reserve trust fund, general fund appropriations, and general fund moneys against the individual income tax expenditure — or, more generally, how the state is doing financially.
The cut in 2023 is due to the positive financial numbers from 2021. The cut in 2024 will be based on the 2022 numbers.
The Kentucky Center for Economic Policy argued that these surpluses are fleeting and make them much less impressive than they seem.
“The revenue surpluses we see today will be a thing of the past,” said Jason Bailey, executive director of the Economic Policy Center, in December. “At some point, things will return to the historic norm in which Kentucky has very tight budgets and modest revenue growth.”
Last week, Gov. Andy Beshear wouldn’t say if he would veto the bill if it hits his desk this week. Instead, he said he would “carefully consider” it if it helps families in the short term.
“While it may hurt our fiscal stability in the long run, I’m gonna have to look at how it can help our families now, so we’ll carefully consider it,” Beshear said.
Speaking after the Senate’s Appropriation and Revenue committee, Sen. McDaniel said the bill is good policy and allows Kentuckians to keep more of their income.
“I think after careful consideration, you realize that this is good policy, and it would be unwise to not do this and not give Kentuckians the opportunity to keep more of their income,” McDaniel said.
Intending to eliminate the income tax over 10 years, McDaniel also said he sees a path to get down into the three percent range soon.
“I’m always reluctant to try to predict those long-term things,” McDaniel said. “At the earliest, it would be 10 years.”