From the desk of Nancy Tate:

House takes historic step towards tax modernization, eliminating personal income tax for Kentuckians

Frankfort, Kentucky (March 4, 2022) – Legislation that would modernize Kentucky’s tax structure and gradually eliminate the state personal income tax cleared the House on Friday. The bill, HB 8, represents the next step in the House Majority’s commitment to growing the state’s economy by making the state’s tax code more attractive for working Kentuckians and individuals considering relocating to Kentucky. The measure is sponsored by House Appropriations and Revenue Chair Jason Petrie and Vice Chair Brandon Reed.

“Five years ago, we began overhauling the state’s tax code by lowering taxes and broadening the base. As a result, we saw a major jump in jobs, economic investment, and state revenue. HB 8 builds on those accomplishments by leaving more money in the pockets of the people who earned it, and it does so without placing the services Kentuckians need at risk,” Petrie said.

HB 8 would lower the state’s 5% income tax incrementally over a period of years until it is eliminated. The first decrease would reduce the income tax rate an entire percentage point to 4% on January 1, 2023, leaving an estimated $1 billion in taxpayer pockets to be invested and spent in local communities. That cost would be covered by funding set aside in the version of the budget passed by the House earlier this session.

“We were very intentional in passing a budget that both meets our state’s needs and resists the temptation to spend every dollar. As a result, we have a once in a lifetime opportunity to make long-term, generational change,” said Reed. “HB 8 advances our tax policies from those that penalize productivity to those that create a state economy that invests in its own people.”

While the first decrease is automatic, HB 8 requires the state to meet additional revenue targets before additional rate reductions can occur. Commonly referred to as triggers, the thresholds are based primarily on state revenue levels. Lawmakers used conservative revenue forecasts based on the work of the Consensus Forecasting Group (CFG) and available sales tax data to predict future state revenues.

Petrie added that HB 8 makes no changes in the corporate income tax or the limited liability entity tax (LLET), nor does it include a rumored expansion of the sales tax to traditionally non-taxed items like groceries and medication. Instead, it focuses on eliminating the personal income tax that working Kentuckians and those with retirement income pay.

“The same people threatening that this bill will lead to budget cuts were telling us that tax modernization would mean increasing the sales tax and taxing groceries and medication. Those accusations were false and these are as well,” Petrie added. “The truth is, we must grow our economy today to fund the progress of tomorrow. We are confident that state revenue will continue to support a 4% rate over time and that we will see a greater benefit each time we lower the personal income tax rate.

To ensure further decreases are triggered, HB 8 transfers away from taxing income to discretionary, consumption based taxes that are paid by those who visit the state as well as those who live here. It broadens the tax base to include extending the sales tax or a user fee to the following services as well as others listed in the bill:
–          Non-Primary Residential Utilities (primary residences would remain exempt)
–          Taxi cabs, car rentals, or transportation services like Uber and Lyft
–          Temporary Rental Services (AirBnB, VRBO)
–          Residential and Nonresidential Security Systems
–          Bodyguard and Self-Protection Services
–          Process Servers
–          Valet and Parking Services
–          Pleasure Watercraft Docking
–          Entertainment Venues and Event Space Rentals
–          Legislative and Executive Branch Lobbying
–          Cosmetic Surgery Procedures (non-medically necessary)
–          Personal Financial Planning
–          Private Mail Services
–          Road and Travel Services
–          Executive Employee Recruitment Services
–          Unsolicited Telemarketing Services
–          Public Opinion Research

The version of HB 8 approved by the House includes a tax amnesty program, essentially a window of time that those who owe taxes can pay their bills without penalty. The amnesty program was proposed by Representative Ken Fleming and is expected to lead to the collection of more than $200 million.

“Tax amnesties have been used successfully in the past, and there is even more potential with a more effective, efficient approach,” Fleming added. “We’d ideally like to see the state use a third party administrator with experience and a proven record, but would allow the Department of Revenue to do so.”

The measure also implements a battery reclamation fee on electric and hybrid motor vehicles and a tax on the use of fee-for-service charging stations. Revenue raised through these mechanisms would be earmarked to the state road fund and general fund.

“Lowering the income tax provides multiple benefits like leaving more money in our local communities. We’re also using this proposal as a tool to grow our workforce and improve the quality of life for all Kentuckians,” Reed added. “HB 8 benefits working Kentuckians and makes the state more attractive to those who are interested in relocating to our state, who will in turn make economic investments in communities throughout the state.”

Petrie and Reed are also the primary sponsors of HB 1, the House budget proposal that includes record funding for education, a continued commitment to the state’s budget reserve trust fund, and pay increases for the Kentucky State Police, state employees, social workers, and educators. That bill passed the House on January 20 and is now in the Senate for consideration.

For more information about HB 8, visit the legislature’s website at legislature.ky.gov.