At the interim joint Appropriations and Revenue Committee meeting Wednesday, Kentucky Chamber Center for Policy and Research Executive Director Dr. Charles Aull and Tax Foundation Senior Policy Analyst Katherine Loughead testified on Kentucky’s progress and opportunities for competitive growth.
In 2018 and 2019, the General Assembly passed reforms to Kentucky’s tax code, which include eliminating income tax brackets and reducing the individual and corporate income tax rate from six to five percent, adjusting how the state determines taxable income for businesses, creating a credit for businesses to offset taxes on inventories, and modernizing Kentucky’s sales tax base.
Last year, the Tax Foundation released a Kentucky-focused report that said, “Kentucky has a unique opportunity to build a name for itself as a highly sought-after destination to live and work, and structural tax modernization will play a critical role in any such effort.”
Following the release of that report, the legislature passed House Bill 8 in the 2022 legislative session, which created a plan to gradually and carefully phase out Kentucky’s individual income tax if the state meets certain revenue, savings, and spending goals.
During the presentation, Aull said lower individual income taxes are a key way states are competing for workers. He shared data showing that low or no-individual income tax states are attracting more domestic migration than higher-individual income tax states. This data compliments the academic literature on the impact of taxes on geographic mobility and economic decision-making.
“Tax reform puts Kentucky on a long-term trajectory for competing for workers and population growth,” Aull said.
Kentucky’s population growth has underperformed the nation for the past 70 years. Aull specifically pointed to Tennessee, where the population has grown from 3,291,718 to 6,910,840 between 1950 and 2020. During that same time, Kentucky’s population has grown from 2,944,806 to 4,505,836.
Though recent legislative progress caused Kentucky’s tax ranking to move from 33rd to 18th in the nation, Aull stressed the importance of additional reforms to ensure Kentucky is on a path toward growth, especially as the state looks to attract talent in the midst of a major workforce shortage.
Kentucky is not the only state that has enacted reforms, Loughead said, stating that 23 other states have also passed income tax reductions in 2021 and 2022. If Kentucky is going to stand out compared to these other states, work must continue to make its tax code more competitive, she said.
The Chamber’s top recommendations for future reforms include efforts to
- Follow through on House Bill 8 and implement improvements when opportunities arise.
- Improve cost recovery in Kentucky by allowing businesses to expense more (or all) of major investments in the year in which a cost is incurred.
- Repeal Kentucky’s outdated Limited Liability Entity Tax (LLET), which produces minimal revenue while adding layers of complexity
- Make the inventory tax credit fully refundable to effectively repeal taxes on inventory
- Allow local taxing jurisdictions to phase out occupational licensing taxes on employee payrolls and business net profits and replace them with local sales and use taxes.
The Tax Foundation voiced similar recommendations, including repealing the LLET, improving cost recovery, shifting away from local occupational licensing taxes, and addressing issues with taxes on inventory and tangible personal property.