The Big Bluegrass Breakdown

Kentucky Republicans, in a position where they can pass anything they want with a supermajority and override any veto by Democratic Gov. Andy Beshear, are set to turn the commonwealth into the poorest state in the nation.

 

The top priority bill of the Kentucky General Assembly's Republican supermajority, which would lower the state's individual income tax rate to 4% beginning in 2024, passed through the state House Thursday.

House Bill 1, which would also codify an automatic reduction of the tax rate from 5% to 4.5% for Jan. 1 of this year, was passed out of the chamber on a near party-line vote of 79-19, advancing the GOP supermajority's long-term plan to eventually eliminate Kentucky's income tax.

The tax cut bill passed through the House budget committee earlier that morning, with Republicans touting it as a way to put more money back into the pockets of taxpayers and spur future economic and population growth.

"It's putting more money back (to) the hard-working Kentuckians across the commonwealth," said Rep. Brandon Reed, R-Hodgenville, the lead sponsor of the bill and budget committee vice chair. "They'll be able to spend their money like they see fit, they'll be able to pay down debt, they'll be able to save for their families and spend accordingly."

All four Democrats on the budget committee voted against HB 1, arguing it would deprive the state's General Fund of more than $1 billion in tax revenue annually from the previous 5% rate, while largely benefiting the wealthiest in the state.

"This particular piece of legislation hurts lower-income Kentuckians and helps the wealthier, higher-income Kentuckians," said Rep. Ruth Ann Palumbo, D-Lexington. "It is not sustainable. Future legislators will have to raise taxes and we are not being fiscally responsible."

The tax cut bill is a product of Republicans' landmark House Bill 8 that passed in the 2022 session, which seeks to trigger automatic reductions of .5% to the individual income tax rate each year — so long as two budget conditions are met — until the income tax is eliminated.

Those HB 8 conditions are that the budget reserve trust fund (often called rainy day fund) is at least 10% of tax revenue for the previous fiscal year, and those same receipts exceed spending by at least the amount of revenue that would be lost by cutting the tax rate a full percentage point.

While the reduction of the tax rate from 5% to 4.5% beginning this year was automatic due to those conditions being met, HB 1 codifies that change, while also approving the further reduction to 4% beginning Jan. 1, 2024.

A fiscal note for HB 1 estimated it would reduce state tax revenue by $316 million through just the first half of 2024.

Pam Thomas with left-leaning think tank Kentucky Center for Economic Policy told the committee a 4% tax rate would result in state revenues dropping by roughly $1.2 billion annually from what they would be at 5% — more than what the state appropriates for its entire higher education system.

Noting the income tax reduction under the bill would be permanent, Thomas said the sales tax may have to be raised in the future if the economy hits a downturn and the state doesn't have enough revenue to meet critical obligations, disproportionately hurting lower-income people.

However, Rep. Jason Petrie, the Republican chair of the budget committee, dismissed those fears, saying Democratic critics have warned of pending increases to the sales tax rate since the legislature cut individual and corporate income tax rates from 6% to 5% in 2018, which hasn't happened.

"The rate of the sales tax remains the same," Petrie said. "We have every intent of continuing with that same sales tax rate."

Under House Bill 8, dozens of services previously exempt from a sales tax lost that exemption, though the estimated revenue from those moves was roughly $100 million — far from making up for revenue lost from the income tax cut.

 

The goal of course is to eliminate the state's income tax completely in a decade, leaving the state dependent on double digit sales taxes on goods and services, while also cutting as much as they can from schools, roads, social programs and basic government services.   The state's budget surplus will vanish, and the wealthiest Kentuckians will get tens of thousands of dollars.

Without income tax, the state's general fund will collapse, or have to be replaced with billions in additional sales tax, which is exactly what's going to come in the years ahead.