New Business Tax Climate Rankings Underscore the Need for Tax Reform in Kentucky

Kentucky now finds itself between two states with two of the most economically competitive tax systems in the nation. According to the Tax Foundation’s new 2022 Business Tax Climate Index, Tennessee has the 8th most competitive tax code in the country, while Indiana has the 9th most competitive. Sandwiched in between them is Kentucky, which ranks 18th, on par with where we were last year. 

The Tax Foundation’s annual Business Tax Climate Index is a well-respected ranking of all 50 states’ tax codes. It considers more than 120 tax variables and ranks states based on the competitiveness of specific taxes such as individual income, corporate, sales, property, and unemployment insurance. 

“The Tax Foundation’s State Business Tax Climate Index enables business leaders, government policymakers, and taxpayers to gauge how their states’ tax systems compare. While there are many ways to show how much is collected in taxes by state governments, the Index is designed to show how well states structure their tax systems and provides a road map for improvement,” the report states in its executive summary. 

In addition to Tennessee and Indiana, other states within our region have high-ranked tax codes. Missouri ranks 13th, while North Carolina ranks 11th. In 2021, both of these states took steps to implement additional reforms to enhance the competitiveness of their tax systems.  

Kentucky has long competed with both Tennessee and Indiana for jobs and workers, though these two states have outpaced Kentucky in GDP growth and population growth. Their positions within the top 10 states for their tax code underscore the need for bold, comprehensive tax reform in Kentucky. 

“Tax reform is the Kentucky Chamber’s top legislative priority heading into the 2022 session in Frankfort,” said Kentucky Chamber President & CEO Ashli Watts. “To outcompete neighboring states like Indiana and Tennessee for jobs and workers, we need a tax code that is up to the task. These new rankings highlight the importance of tackling this issue next year.”

While the General Assembly has taken great strides in recent years to improve the competitiveness of its tax code – moving from 37th to 18th between 2017 and 2022 – competition with Indiana and Tennessee is intensifying and much more needs to be done to ensure Kentucky’s economic future. For example, with Indiana’s low individual income tax rate of just 3.23 percent and Tennessee’s non-existent individual income tax, Kentucky needs to improve the competitiveness of taxes on income, which is currently set at 5 percent. Lower taxes on income can support greater population growth and increase personal income and GDP growth. 

To drive conversations around tax reform in Kentucky, the Kentucky Chamber announced a new partnership with the Tax Foundation earlier in 2021. A key part of this partnership, the Tax Foundation produced an independent analysis of Kentucky’s tax code, providing an array of options to make Kentucky more competitive for growth. The Tax Foundation’s independent analysis of Kentucky can be read here.