Kentuckians are a step closer to another income tax cut after Republicans passed a measure out of the state House of Representatives on Thursday, despite concerns that the move will hobble the state’s ability to generate revenue, especially during a recession.
The income tax dropped from 5% to 4.5% this year already and under House Bill 1, the rate would be reduced to 4% beginning in 2024. Republicans have signaled they plan to eliminate the income tax altogether in the future.
Rep. Jason Petrie, the Republican chair of the House budget committee, said recent budget surpluses and a hefty rainy day fund provide enough of a safety cushion.
“Even when we hit a downturn, and our revenues decrease, we have a lot of downward cushion in the revenue stream before we even have to think about tapping a reserve for bad times,” he said.
Republicans rushed the measure through the legislative process on Thursday, advancing it out of the House budget committee and passing it out of the full House with a vote of 79 to 19.
During the committee hearing, Petrie argued that the legislature had allocated enough for social services in the last state budget and didn’t need as much money.
“Those people who are industrious, who are wage earners, want to have the income tax rate pulled down a little bit because we really don’t need that money in the state government. We’ve budgeted in a way that the state doesn’t need as much. So let’s give it back to them,” he said.
After the state recorded historic budget surpluses in 2021 and 2022 and Republicans padded their majorities in both houses, the GOP-led legislature has sped up the move. Critics say the move is risky for the state’s economic health and could lead to an expansion of the sales tax.
Kentucky currently has $2.7 billion in its Budget Reserve Trust Fund, more commonly known as the “rainy day” fund. The state is projected to have another budget surplus this year.
Pam Thomas with the Kentucky Center for Economic Policy, a progressive think tank, testified that the move wouldn’t be as beneficial to Kentucky families as Petrie and other Republicans said it would be.
“The typical Kentucky family, those in the middle class, will retain between 38 cents and $5 a week due to the reduction from 5% to 4.5%, which isn’t really much. They’d however lose a lot more if sales taxes are increased,” Thomas said.
Thomas and Democratic representatives pointed to the dire need for funds to improve social services.
“There’s a critical teacher shortage, affordable childcare isn’t readily available across the state, the department of juvenile justice and the children it serves are suffering greatly because of the inability to adequately staff their facilities,” she said.
Petrie responded that they’d made enough investments in social services in the last budget cycles to afford the cuts.
“That narrative is bad for the public. We can go into the budget now and say ‘what are the actual needs, not wants by special interests?’,” he said.
Republican lawmakers in the committee also justified the income tax cut by saying it will make the state more competitive with Tennessee, which has no income tax except for stock dividends and lending interest.
But Tennessee also relies heavily on a 7% sales tax, and the lack of a broad-based income tax makes it the seventh most regressive revenue system in the country, according to the progressive Institute on Taxation and Economic Policy.
To justify the tax cut last year, lawmakers expanded the state’s 6% sales takes to 31 services ranging from airport parking fees, personal fitness training and labor to repair household appliances.
