The Kentucky legislature continued its march to eliminate the state income tax Thursday, as the Interim Joint Committee on Appropriations and Revenue met to discuss further implementing the law.
“House Bill 8 enacted several changes to our revenue structure,” said Jennifer Hays, committee staff administrator of the Appropriations and Revenue, Legislative Research Commission, “and for individual income tax purposes, there was enacted an annual process to reduce the tax rate over time.”
House Bill 8 passed during the 2022 legislative session, and this is the first time the House and Senate A&R committees met to discuss the bill, which will cut the state income tax from five percent to four-and-a-half percent starting on Jan. 1, 2023.
The interim meetings combine members from the Senate and House and meet when the legislature is not in session; members of the committees meet separately when in session. The goal is to bring them together to form one large committee instead of having senators and representatives talk about the issues separately.
“This is the second major tax overhaul in less than five years, and we have every indication that it will be as successful as the first, which delivered record economic growth and historic job creation,” said HB 8 Sponsor and House Co-Chair of the IJC on Appropriations and Revenue Jason Petrie. “We also have to recognize that it means real relief to working Kentuckians who are facing the impact of inflation.”
Over time, the income tax will decrease by half a percent until it’s at zero. The bill initially would reduce it by one percent, but in the version that became law, it settled on the smaller amount. There is a formula to hit preset revenue triggers that the state must meet, including revenue exceeding expenses. The first decrease is based on Fiscal Year 2021 and is expected to save taxpayers around $500 million.
“On Sept. 5, 2022, DOR (Department of Revenue) and the office of the state budget director will report to you, as a committee, certain revenue, and budgetary numbers,” Hays said as she presented info to the A&R committee. “These are called reduction conditions.”
House Bill 659 amended House Bill 8 to say that fiscal data from the years 2021 and 2022 will be presented to the DOR instead of just 2021. Fiscal year data from 2021 determines the rate reduction in 2023, fiscal year data from 2022 determines the rate reduction in 2024, and so on. These revenue numbers will determine when the individual income tax rate will be reduced.
The individual rate reduction conditions include money in the balance reserve trust fund, general fund appropriations, and general fund moneys against the individual income tax expenditure.
“There are two conditions that must be met each fiscal year,” Hays said.
The first condition is that the balance in the BRTF at the end of a fiscal year shall be equal to or greater than 10% of the GF moneys for that fiscal year. The second is that GF moneys at the end of a fiscal year shall be equal to or greater than GF appropriations for that fiscal year plus the IIT equivalent for that fiscal year.
While Republicans in the legislature backed the bill, the Kentucky Center for Economic Policy said the bill would benefit the rich and hurt normal Kentuckians.
“HB 8 would begin aggressively cutting Kentucky’s income tax rate next year and eventually completely eliminate it, devastating funding for Kentucky’s schools, health, human services, infrastructure, and other needs,” said Jason Bailey, the executive director of the center said in an op-ed. “The resulting tax cut is skewed heavily to the rich. HB 8 includes a few modest revenue raisers that will come nowhere close to offsetting the lost revenue from the eliminated income tax, which funds 40% of Kentucky’s budget.”
At a press conference during the session, Gov. Andy Beshear warned against any significant tax reform that would add money to the pockets of corporations and wealthy Kentuckians.
“Our families don’t need this type of ‘reform.’ They need relief,” Beshear said. “So, if we are going to alter our tax structure, let’s do it to address the current inflation and in a way that will help our families. Let’s do it in a way that will make things cost less for all Kentuckians.”
The interim meetings combine members from the Senate and House and meet when the legislature is not in session; members of the committees meet separately when in session. The goal is to bring them together to form one large committee instead of having senators and representatives talk about the issues separately.
