Kentucky's Republican tax reform starts to hit worker paychecks

LOUISVILLE, Ky. (WDRB) – The sweeping tax changes enacted by Kentucky’s Republican-controlled legislature in April are starting to hit paychecks, giving many workers in the state more take-home pay.

Employers and the companies that handle their payroll, like ADP, are tweaking the amounts withheld from workers’ checks after the Kentucky Department of Revenue put out revised instructions last month conforming with the GOP-led tax reform.

For a worker paid $36,240 a year, the tax reform means an extra $6.30 per month in take-home pay, according to WDRB calculations verified by a certified public accountant. The average wage for all jobs in the state is $42,410, according to federal statistics.

While the income tax rate cuts are beginning to show up in paychecks, lawmakers also raised taxes in other ways, meaning the reform will result in some Kentuckians paying more taxes, on balance, and others less.

“It’s probably going to be a mix of both depending on your situation,” said Mike Harbold, associate director of tax services at Louisville accounting firm Dean Dorton Allen Ford.  “… They are definitely going to be winners and losers.”

The changes will amount to net savings for “the overwhelming majority of Kentuckians,” said Sen. Chris McDaniel, chairman of the Senate budget committee and a member of the Republican leadership that shepherded the tax reform.

Critics of the plan dispute that, saying the changes result in regular people paying more while giving high-income earners a big break.

“People need to understand the totality of the impact,” said Jason Bailey, director of the progressive Kentucky Center for Economic Policy in Berea, who called the overall plan “a huge windfall” for wealthy Kentuckians.

An analysis by Bailey’s group predicts 95 percent of the state’s residents will pay more, while only the top 5 percent of families – those with income of at least $175,000 – getting a net benefit.  

While trimming income tax rates, lawmakers also raised the state cigarette tax and extended the state’s 6 percent sales tax to dozens of things that were previously untaxed, including veterinary care for small animals like dogs and cats, and the labor on car repairs.  The new sales taxes take effect July 1.

They also curtailed or eliminated breaks for retirement income and deductions like local taxes and high medical expenses.

The net effect of the changes depends on individual circumstances.

The worker paid $36,240 a year, for example, could see her income tax savings of $75.68 a year wiped out by a car repair that includes $1,261 in newly taxed labor charges, for example.

If the worker spent additional money on other newly taxed items such as a dog grooming, summer camp or YMCA membership, she would be worse off.

New, flat income tax rate

The state now taxes income at a flat 5 percent rate. Before the reform, the rate was 5.8 percent for income between $8,000 and $75,000, and 6 percent for any amounts over $75,000.

The state previously had rates ranging from 2 to 5 percent for the first $8,000 of income. Now the first $8,000 is taxed at the 5 percent rate.

Kentucky’s family-size credit continues to insulate low-income workers – those earning up to $12,060 for a single person and $24,600 for a family of four – from income taxes, so the hike on the first $8,000 in income won’t affect those earning up to 133 percent of the federal poverty level.

The changes eliminated several itemized deductions that Kentuckians used to reduce their state income taxes, including amounts paid for property taxes and local income taxes. Now the only significant deductions allowed are for charitable donations and mortgage interest.

But those deductions primarily matter to higher income households because most people don’t itemize and instead opt for the standard deduction the state gives to all taxpayers, McDaniel said.

Still, “high-income earners would be the ones who are most obviously helped,” by the tax changes, said Harbold, the tax accountant. The 1-percentage point reduction in tax for all income over $75,000 makes up for lost deductions, and the higher the income, the more saved in taxes, he said.

McDaniel said that it’s high-income earners who also spend money on the dozen “luxury” services that Kentucky will start to tax on July 1, such as golf course fees, dry cleaning and landscaping.

Critics counter that cars and pets are not luxuries enjoyed only by upper-income Kentuckians.

“Nobody chooses to have their car break down,” Bailey said.

Another big change is that the state now allows retirees to exempt only their first $31,100 of income from pensions, IRA and 401-k accounts, down from $41,100 before the tax reform.

“Anybody that was earning more than $31,000 of pension income obviously gets hurt,” Harbold said.

McDaniel said the state continues not to tax Social Security benefits and that the $31,100 exclusion is still “one of the most generous in the nation.”

Reach reporter Chris Otts at 502-585-0822, cotts@wdrb.com, on Twitter or on Facebook. Copyright 2018 WDRB News. All rights reserved.

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Chris Otts reports for WDRB.com about business and economic topics, higher education and local / state government. He joined WDRB News in 2013 after seven years with The Courier-Journal. Got a tip? Chris is at 502-585-0822 and cotts@wdrb.com.