Kentucky lawmakers expect to move legislation to lower the income tax further through both chambers of the legislature this week.
“I think the triggers have been hit. It will take place,” said Senate President Robert Stivers on the continued income tax reduction. “By next year, we will be down to 4%.”
The reductions each year depend on the balance of money in the 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 first income tax reduction took place on Jan. 1, 2023, moving from 5 to 4.5%.
House Bill 1, introduced on the first day of the 2023 General Assembly, seeks to lower the tax from 4.5 to 4%.
House Speaker David Osborne said the bill would most likely move out of his chamber on Thursday.
The state is currently able to meet these requirements for the reduction due to surpluses over the last two years totaling more than $1 billion.
In December, the Consensus Forecasting Group predicted that the state would most likely see surpluses for the next couple of years, as well.
Osborne said to recover some of that lost revenue in the reduction, the state will have increased consumption taxes on some consumer services.
“We happen to believe that it’s good policy to allow taxpayers to keep more of their hard-earned money,” Osborne said.
The Kentucky for Economic Policy, a left-leaning policy think tank, thinks the surpluses are fleeting. The group held a press conference on the first day of the session, in addition to releasing a November report titled the “Mirage of Inflation-Driven Surpluses Is No Basis for Permanent Tax Cuts.”
In the report, the Center argues that the state has record surpluses because the federal stimulus money during the COVID-19 pandemic led to a faster-than-expected recovery from the pandemic recession and high inflation.
“The revenue surpluses we see today will be a thing of the past,” said the Policy Center’s Executive Director Jason Bailey in December. “At some point, things will return to the historic norm in which Kentucky has very tight budgets and modest revenue growth.”