Republicans in the Kentucky House unveiled a bill that would reduce and eventually eliminate the state income tax, wiping out a primary source of government revenue.
House Bill 8, the so-called “tax modernization proposal,” would lower the state’s 5% income tax to 4% in 2023 and then set up triggers to reduce the tax further until it’s entirely eliminated. To help pay for that, it would expand the state's 6% sales tax to 38 previously untaxed services, from parking to refrigerator maintenance.
Rep. Jason Petrie of Elkton, the bill’s sponsor and chair of the House budget committee, said it would allow Kentuckians to keep more of their income rather than giving it to the government to spend on their behalf.
“We are confident that state revenue will continue to support a 4% rate over time,” Petrie said. “However, we will see a greater benefit from eliminating personal income tax completely.”
The state income tax currently funds around 40% of the state budget. Eliminating it would devastate public funding for schools, health, infrastructure and human services, according to an analysis from the Kentucky Center for Economic Policy.
Jason Bailey, executive director of the progressive think tank, said even a 1% reduction in the state’s income tax would reduce state coffers by $1.1 billion per year, an amount equivalent to more than Kentucky spends on its public school system.
“What it would do is severely damage the funding for things that benefit all of us, schools, healthcare, infrastructure, and take those dollars and give them to people whose incomes are already soaring,” Bailey said. “This is a radical bill, it’s a reckless bill that would doom Kentucky.”
Bailey said the wealthiest Kentuckians would see the largest benefits under the proposal while poorer people would see a smaller return even as the state cuts funding for vital services.
According to the KCEP analysis, the top 1% of Kentuckians would keep around $55,000 a year if income tax was eliminated, while the bottom 60% would save between $100 to nearly $1,400 per year.
The poorest Kentuckians – those making under $13,000 a year – would save less than $100 per year under the proposal, according to the analysis.
Petrie’s tax proposal would expand the state’s sales tax to services like taxis and ride share services, AirBnB rentals and entertainment venues. It would also add a battery reclamation fee on electric and hybrid vehicles and a fee for service at electric car charging stations.
According to the KCEP analysis, the revenue-raising parts of the bill would not come close to offsetting the losses from the state income tax.
Republicans have long floated the idea of eliminating Kentucky’s income tax, saying the move would make the state more competitive with places like Tennessee, Texas and Florida, which don’t have income taxes. There are currently nine states in the U.S. that have no income tax.
The concept was championed by former Republican Gov. Matt Bevin, who signed a bill flattening Kentucky’s income tax in 2018 and expanding sales taxes to 17 previously untaxed services like automotive repairs and pet grooming.
Bailey said states that have eliminated their income taxes have different kinds of economies with tax bases that can support state revenues. He pointed to the tourism economies of Tennessee, Florida and Nevada, as well as the resource extraction-based economy of Texas.
“So Kentucky doesn’t have any of those things at any level that would be comparable,” Bailey said. “There’s just no way that recipe would come anywhere close to working in Kentucky.”
Democratic Rep. Josie Raymond of Louisville said the bill would widen income inequality and leave the lowest income Kentuckians most vulnerable, calling it a “tearing up of the social contract.”
“The rebate that I could get under House Bill 8 I can’t even upgrade my minivan,” Raymond said. “I'd much rather leave that money in the General Fund and have things that would really benefit my family like paid leave, or pre-K, or climate protection. I just think that's so dangerous.”
