What comes next after the income tax drops in Kentucky?

FRANKFORT, Ky. — Income taxes will go down half a percent because of House Bill 8 from earlier this year, but the real impact is still far off.


What You Need To Know

  • Kentucky lawmakers passed a bill during the regular session earlier this year that could eventually eliminate the state income tax entirely
  • The income tax rate will drop from 5% to 4.5% next year
  • Lawmakers discussed further tax cut ideas during an interim budget committee meeting in Frankfort Wednesday

“House Bill 8 is a long game,” Kentucky Chamber of Commerce researcher Charles Aull told lawmakers Wednesday. “That bill is going to be moving through our system for years and years and years. Really, you’re probably looking at — if everything goes right — we’ll still be talking about that bill for a full decade.”

The income tax will drop from 5% to 4.5% next year, and if the state brings in enough revenue each year, the tax will keep falling until it is eliminated.

Aull said it should help motivate people to move to Kentucky. “Bringing in more residents into the state brings with it more opportunity, more entrants into our labor market and a number of other benefits,” he said. “So it’s certainly something that is worth our attention and something that’s worth focusing on.”

It does come with a cost, though: $650 million out of the state budget in the first year, according to a press release from the House Republican caucus, and potentially billions down the line.

Several Democrats have said that could lead to a higher sales tax, and a heavier hit to people with less income. “What I saw presented is a series of baby steps, right? It’s presented as baby steps,” Rep. Josie Raymond (D-Louisville) said. “But it doesn’t really matter how big our steps are if we’re walking towards the edge of a cliff.”

Rep. Jason Petrie (R-Elkton), the House’s lead budget negotiator, said raising the sales tax is the last thing he wants to consider. “That is not my goal. I don’t think anyone else’s goal is that. We’ve stuck with broadening the (tax) base,” he said. “We look for ways to increase growth and allow that organic growth to take place so that there are increases in revenue that we can take advantage of to have better tax policy over time.”

Aull and a representative with the Tax Foundation presented multiple plans to cut Kentucky taxes further, including a repeal of the limited liability entity tax and tweaks to how the inventory tax works.

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