On Friday, a plan to make key changes to Kentucky’s tax structure was introduced in the House. Bill 8 would reduce the personal income tax rate from 5% to 4% starting in 2023. And as long as the state meets certain income thresholds, the income tax rate would continue to decline by 0.5% or 1% each year until the personal income tax rate reaches zero.
After debating HB 8 for nearly three hours, the measure was approved by the House by a vote of 67 to 23.
The bill’s main sponsor, Rep. Jason Petrie, R-Elkton, said the journey to tax modernization has been years in the making. One of the first measures taken by the General Assembly was the reduction of the personal income tax rate from 6% to 5% in 2018.
“Tax modernization – these changes, these revenue measures that we are looking at – are largely for economic growth – basically – for the whole Commonwealth,” Petrie said. “You look at this stagnation over time, and there’s a deeper issue: our people.”
Data shows that Kentucky has struggled to have significant economic and population growth and has lagged behind many other states. Tax modernization is one of the key steps Kentucky needs to see growth in these areas, Petrie said.
The plan to eventually eliminate state income tax will take years. At the end of each fiscal year, Petrie said the Revenue Department will consider whether actual state revenue, not an estimated amount, meets one of the “trigger” requirements to reduce the tax rate on the state revenue of one-half or one percent.
Under HB 8, for the income tax rate to decrease by half a percent, the general fund must see a $1 billion increase in revenue.
For example, if the state’s general fund reaches $14.5 billion at the end of fiscal year 2023, the income tax rate would be lowered to 3.5% on January 1, 2024. If income reach $15.5 billion, the income tax rate would instead be lowered to 3%, but no more than that.
“It can’t exceed 1% in any given cycle,” Petrie said. “We don’t want to go overboard on our skis…no more than one point at a time so we can all adjust over time, including our budgets and everyone else.”
The way the bill is written means that once the income tax rate goes down, it can’t be triggered to go up again, Petrie added.
In order to reduce the income tax rate, the state plans to broaden the sales tax base.
Another provision of HB 8 imposes a 6% user tax on non-essential services such as non-essential cosmetic surgery, body modifications, photography, research surveys, bodyguard services, marketing, etc Another section of the bill imposes a tax on ride-sharing services, such as Uber and Lyft, and electric vehicles.
Owners of electric vehicles would have to pay an excise tax of three cents per kilowatt hour at vehicle charging stations. The tax would come into effect on January 1, 2023, if HB 8 becomes law.
During the debate on HB 8, many members of the House expressed concerns about the impact the bill could have on low-income workers and families and small business owners.
“I don’t think the math adds up, and I also think it’s regressive,” said Rep. Rachel Roberts, D-Newport. “I think it hurts the poor in our state. I think it favors wealthy people in our state. And I think that will be yet another nail in the coffin of our hopes of growing small businesses here.
Rep. Al Gentry, D-Louisville, agreed with Roberts. In addition to worrying about low-income workers, Gentry spoke of other states that don’t have income taxes, such as Tennessee and Nevada, which compensate by having a robust tourism industry.
“These are very touristy states where tourism — people who come from out of state — pay a good chunk of sales tax,” Gentry said. “That’s why it makes sense there.”
While explaining his “yes” vote, Rep. Shane Baker, R-Somerset, said Kentucky has the tourism industry that other states have.
“Yellowstone (national park) brings in about $650 million a year. The Kentucky Oaks and the Kentucky Derby (bring in) $350 million in two days. In 2015, Kentucky’s state parks had an economic impact of $890 million,” Baker said, adding that Kentucky has a lot to offer, and there are many reasons it is proud to. vote in favor of HB 8.
HB 8 now goes to the Senate for consideration.