Kentucky tax reforms explained

VIDEO AT THE BOTTOM OF THIS STORY: State lawmakers passed tax reform this year to help balance the state’s budget for the next two years, offset growing costs associated with stabilizing the state’s pension systems for Kentucky teachers, police officers, and other state employees, and make the state more competitive.

The tax reforms passed in 2018 including lowering Kentucky’s individual and corporate income taxes and broadening the sales tax base to new services are now in effect as of July 1.

The reform plan represents the first major changes made to Kentucky’s tax code in decades. The reforms in the new law expected to bring in hundreds of millions of dollars over the next two years to help fund education, pensions, and other essential government services.

Personal income tax has been lowered to a flat 5% for all Kentuckians rather than the previous tiered brackets which were as follows:

Many of the lowest income Kentuckians will continue to be excluded from the income tax, meaning the change will not impact them.

The same flat 5% income tax rate is being applied to the corporate income tax, which leaders say will improve competitiveness over the previous 4%, 5%, and 6% brackets applied to corporations.

The changes to the individual and corporate income tax are in effect for the tax year starting January 1, 2018. Therefore, you can see the full impact of these changes when filing taxes for 2018.

The cigarette tax has been increased by 50 cents, which will bring Kentucky’s cigarette tax to $1.10 per pack, still well below the national average of $1.66. The tax, many argue, will not only bring in much-needed revenue for the state but will also improve health outcomes, as Kentucky is the leading state for lung cancer.

Kentuckians will now see a sales tax applied to certain services where it had not been previously, which will help expand the state’s tax base. Before the law was passed, no services had been taxed, leaving money on the table in the state. Kentucky is behind many states in this area by only taxing 32% of its economy, according to the Tax Foundation, a national non-partisan group conducting research on state and federal tax policies.

The services now taxed as of July 1 are as follows:

The plan also simplifies the state’s tax system by removing many deductions for state income tax and will only allow for deductions relating to social security income, mortgage interest, and charitable donations. It also removes a $10 tax credit that had previously been allowed.

Kentucky’s tax code now also conforms to the federal IRS codes adopted with federal tax reform in December 2017. Leaders state this is important to simply the tax code.

The state’s inventory tax will be phased out over a four-year period to allow local governments to conform to the change. Kentucky is one of very few states with an inventory tax and elimination would allow the state to treat all businesses the equally.

Lawmakers have also told The Bottom Line these tax reforms are an important first step to making Kentucky more competitive with other states as the Commonwealth’s tax code has been outdated for many years.

Acting House Speaker David Osborne and Senate President Robert Stivers both point to many tax experts stating a good tax system is one that has a broad base and allows for low rates, is simple, and doesn’t impede economic growth and add that is the direction they plan to continue in as they take on more tax reforms in the coming years.

Watch Acting House Speaker Osborne’s interview with The Bottom Line on tax reform here.

Hear Senate President Stivers remarks on taxes here.

Read the opinions of other legislative leaders on what comes next with tax reform and what changes they expect to make here.

Watch a short video explaining the reforms here: