Kentucky House passes income tax reform on near party-line vote

Kentucky House Republicans passed a bill Friday that pledges to overhaul the state’s tax code, with the potential of eliminating the personal income tax.

House Bill 8 passed by 67-23 vote with only one of the 25 Democrats in the House voting for the bill. Among its provisions, the legislation calls for the income tax rate to drop from 5% to 4% on Jan. 1. Proponents said it would allow taxpayers to keep $1 billion.

From there, the tax rate would drop when the state’s general fund receipts hit certain thresholds. Once those receipts tally $20.5 billion in a fiscal year, the income tax would be eliminated.

HB 8 also calls for a number of additional services to be included in the state’s 6% sales tax, including taxis and car rentals, security systems, non-medically necessary cosmetic procedures and public opinion research.

The bill does not seek to raise the income tax rate or adjust business taxes. It does, however, include new taxes related to the charging of electric vehicles.

House Appropriations and Revenue Chair Jason Petrie, the primary sponsor of the bill, said the new legislation follows in the tradition of the tax reform lawmakers passed five years ago.

“As a result, we saw a major jump in jobs, economic investment and state revenue,” said Petrie, R-Elkton. “HB 8 builds on those accomplishments by leaving more money in the pockets of the people who earned it, and it does so without placing the services Kentuckians need at risk.”

The bill now goes to the Senate, where Republicans also enjoy a supermajority.

Tax reform has been a major priority for the Republican caucus, with lawmakers citing a need to make Kentucky more competitive against other states in attracting jobs and new residents.

However, the state is coming off a highly successful 2021 that saw record levels of economic development investment and new jobs created.

The House’s plan comes at a time when Gov. Andy Beshear, a Democrat, has proposed a temporary sales tax reduction to help offset the growth in inflation in the past year. Senate Republicans, meanwhile, also have proposed a refund to Kentucky taxpayers citing the state’s nearly $2 billion budget surplus.

With Republicans holding veto-proof majorities in both chambers, it bodes well for the chances to enact comprehensive reform before the session ends in mid-April. However, critics worry putting more of the economic burden on use taxes is a regressive policy that will hurt lower-income families in the state.

Jason Bailey, executive director for the Kentucky Center for Economic Policy, said the top 20% of income earners would receive 65% of the tax cuts. The House plan also would threaten essential state services such as public education and Medicaid, which rely on a steady stream of tax dollars.

“For the sake of Kentucky’s future, I hope cooler heads prevail in the Senate who recognize the need to be fiscally responsible, meet our constitutional responsibility to pass balanced budgets, and protect our core investments in education, Medicaid and other needs from being ravaged for tax cuts to the wealthy,” Bailey said in a statement after the House’s vote.