LOUISVILLE, Ky. (WDRB) -- Kentucky lawmakers are hoping the income tax cut plan that passed through the legislature this week will become law.
House Bill 8 passed through both chambers this week and now awaits Gov. Andy Beshear's action or lack of. Legislative leaders left about $1 billion unspent in the budget to cover changes in the tax code, and the result was tax legislation aimed at gradually phasing out individual income taxes in Kentucky while extending the state sales tax to more services.
The Senate offered a version that revised the conditions to be met to trigger incremental drops in the state's personal income tax rate, which is now at 5%. The tax rate could drop by a half-percentage point at a time if the formula's targets are achieved. Sen. Chris McDaniel, R-Ryland Heights, chairman of the Senate Appropriations and Revenue Committee, said the first rate cut could come as soon as Jan. 1, 2023.
“We do firmly believe in lowering the income tax rate in this state," McDaniel said. "But it has to be done responsibly. And this is a very gradual way to accomplish that safely.”
For a person who makes $60,000 salary, they currently give $3,000 in state income taxes. If the state's income taxes go down to 4.5%, the same person would give $2,700.
"It puts more money in their pockets, and it can do for Kentuckians whatever they want it to do," McDaniel said.
It could take at least two years before McDaniel foresees Kentucky's income tax dropping to 4%, let alone eliminating it completely.
"That's why there are checks in terms of how much money we've got saved," he said. "Are we being disciplined with our appropriations, so on and so forth, to help us get there in a responsible manner?"
From a businesses standpoint, Greater Louisville Inc. (GLI) thinks this reform could help with the workforce shortage.
"Especially in a world where you can work from anywhere, these sorts of things really do have an effect on us being able to attract talent much more than I think they did in the past," said Shelby Somervell, vice president of government affairs.
Ashli Watts, president of the Kentucky Chamber of Commerce, agreed. She said from a statewide perspective it could be a game-changer for border counties.
"If you move over to Tennessee, rather than living in Kentucky, you basically give yourself a 5% raise," Watts said.
To make up for lost income taxes, the bill would also expand sales taxes into more services like cosmetic surgeries, Airbnbs and taxi services like Uber and Lyft.
Watts said she's not worried about any negative impact from the sales tax expansion and feels it's modernizing the tax system.
"I think what we have to think about is that our economy has changed since our tax code was last really updated," she said. "And we really are a service-based economy."
Kentucky Center for Economic Policy posted an analysis of the plan and said it disproportionately benefits wealthy people and would create a budget hole. Watts disagreed based on the data from states with similar tax systems.
"It's proven beneficial, and the argument that it's regressive or that would hurt lower income people is just simply is not proven true in those states," she said.
The bill now awaits Beshear's decision to sign it, veto it or let it pass into law without action.
Lawmakers will reconvene to wrap up work in mid-April and could take up override votes of vetoes. Republicans have supermajorities in both legislative chambers.
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