Kentucky’s plan for tax reform working as intended

A vote to further reduce Kentucky’s individual income tax rate in the 2024 legislative session is unlikely, based on a new state government report released last week. But thanks to action by state policymakers in recent sessions and advocacy by the Kentucky Chamber, Kentucky has made strong progress on tax reform and remains well-positioned to compete for skilled workers and new economic opportunities. 

Last week, the Kentucky Office of State Budget Director (OSBD) released a report showing that the state failed to hit one of two “revenue conditions” to allow for further reductions to Kentucky’s individual income tax. According to a new law passed in 2022, when the state meets certain revenue benchmarks, lawmakers may vote to reduce income taxes by 0.5 percentage points. These two benchmarks require the Commonwealth to have a Budget Reserve Trust Fund balance equal to at least 10 percent of state revenues and see state revenues exceed state appropriations by an amount equal to a 1 percentage point reduction in income taxes. The plan was designed to gradually and carefully phase out income taxes, similar to plans being pursued in other states like North Carolina. 

Kentucky has met these conditions in the past two legislative sessions, allowing for votes by the General Assembly to reduce income taxes in 2022 and 2023. Our current rate is 4.5 percent, but on January 1, 2024, Kentucky’s individual income tax rate will fall to just 4 percent. This is two percentage points lower than it was in 2017, when Kentucky had a graduated income tax structure with a top rate of 6 percent. In the most recent OSBD report, Kentucky missed the benchmark of needing to exceed state appropriations by an amount equal to a 1 percentage point reduction in income taxes. Had Kentucky met both benchmarks, lawmakers would have the opportunity to vote to reduce income taxes to 3.5 percent, effective January 2025.   

Kentucky’s current 4.5 percent individual income tax rate is on par with many states in the midwest and southeast, but state legislatures are acting quickly to reduce their reliance on this particular tax. Indiana, for example, has a rate of just 3.15 percent, and Ohio recently reduced its top individual income tax rate to 3.99 percent. Tennessee, of course, does not levy an income tax. 

Reducing individual income taxes is the top legislative priority of the Kentucky Chamber of Commerce. Business leaders view this priority as a key component of accelerating economic growth in the Commonwealth and increasing our population and skilled workforce. However, the Chamber has committed to pursuing a fiscally responsible strategy to reduce income taxes that ensures the state will continue to be able to make strategic investments in key areas like education, public safety, and economic development. 

“While we are disappointed that the necessary revenue conditions were not met to allow for an income tax rate reduction vote in 2024, we believe the process established by the General Assembly is working as intended,” said Kentucky Chamber President & CEO Ashli Watts. “Phasing out Kentucky’s individual income tax will take time and long-term dedication. The Kentucky Chamber applauds legislators for their commitment to carefully phasing out the income tax, and we will continue working with them to achieve this important goal for our state.”

“We view reducing income taxes as a core component of creating an economy similar to what you see in states like Florida, Texas, and Tennessee that have extremely fast rates of growth in GDP and population,” said Charles Aull, Executive Director of the Kentucky Chamber Center for Policy and Research in an interview with KET. “The key thing is to reach that goal very responsibly and carefully so that we don’t follow the example of states like Kansas. … What’s most important is that we continue making forward progress in reducing income taxes.”

Thanks to reforms passed by the General Assembly and supported by the Kentucky Chamber, Kentucky’s ranking on the Tax Foundation’s annual Business Tax Climate Index has improved from 37th in the nation in 2018 to 18th in 2023. During that same period, General Fund revenues for the state have grown by 39.7 percent. 

Learn more about Kentucky’s approach to reducing individual income taxes in a report by the Kentucky Chamber Center for Policy and Research titled “A Guide to House Bill 8 and Reducing Income Taxes.” Read about why the Chamber is prioritizing tax reform in the report, “Why Tax Reform: Kentucky’s Opportunity for Growth.”

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Jacqueline Pitts
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