Tax reform package lowering Kentucky individual income tax sees final passage

UPDATED: As we reach the end of the legislative session, a tax reform package is on its way to the governor’s desk after seeing final passage Tuesday night. The state House passed the bill with changes 70-24 after the Senate passed it with a 27-7-1 vote Tuesday. Changes to the bill were presented in the Senate Appropriations and Revenue Committee hours earlier.

Senate Appropriations and Revenue Committee Chair Chris McDaniel said the changes to House Bill 8, the tax plan originally put forth by the House, come as a result of work between the two chambers. He added the Senate’s original proposal to provide an income tax rebate to Kentuckians has been dropped and is not included in this plan.

The original House plan decreased the state personal income tax from 5% to 4% beginning in January 2023. From there, the plan provided a pathway to potentially drop the individual income tax rate to zero over four to eight years by lowering the rate in increments of 0.5 to 1 % per year based on a set of triggers built into the legislation.

Changes to those triggers made by the Senate make it so that the individual income tax can drop by 0.5% if by the end of the year, revenues brought in exceed spending and there are extra funds equal to a 1% drop.

The Senate also added that these decreases can only occur if at least 10% of receipts go into the Budget Reserve Trust Fund and that the General Assembly has to be able to return to Frankfort in order to allow the first lowering to happen based on the triggers.

Financial services, travel agencies, and boat docks were removed from the list of services that will now be subject to the sales tax. That list of services still includes nonmedical cosmetic surgery, telemarketing, photography, massages, bodyguards, polling, tattooing, social event planning, investment management services, and much more.

And language about electric vehicles was changed slightly to implement a 3 cent per kilowatt hour electric charging fee and include fees related to hybrid and electric vehicles with effective date in 2024.

In presenting the bill on the House floor, House Bill 8 sponsor Rep. Jason Petrie touted the final product and the changes will be a good for budgeting moving forward.

The amended version of House Bill 8 now goes to the governor’s desk. If the governor vetoes the bill, Kentucky lawmakers will have the ability to override when they come back from the veto recess mid-April.

Stay tuned to The Bottom Line for more updates on tax reform.