Revenue down in Kentucky following income tax cut. Who does it help?

Tue, June 13, 2023

Business, KY Legislature, News

Lexington Times Web Editor

FRANKFORT, KY — Kentucky’s recent income tax cut has drawn both praise and concern as the state grapples with its financial future. While some laud the reduction as a pathway to economic growth, critics argue it could have devastating impacts on the state’s budget and the people who rely on its services.

In May 2023, the Office of State Budget Director reported that General Fund receipts fell by 7.2% compared to the previous year, a decline largely attributed to the income tax cut that took effect in January¹. Individual income tax receipts dipped by $148 million, reflecting the reduction in the tax rate and a higher volume of tax refunds. However, despite the drop in revenue, the state is still expected to achieve a third consecutive year with a budget surplus of over $1 billion¹.

The tax cut, passed by the Republican-led legislature, reduces rates from 5% to 4.5% and comes on the heels of several years of greater-than-expected tax revenue and historic budget surpluses. The GOP has plans to further reduce the tax in future legislative sessions, with the ultimate aim of eliminating it entirely².

Yet, critics argue that the tax cut may “blow a hole” in the state’s revenue-generating mechanism and lead to higher sales taxes on essential items². As part of the funding strategy for the tax cut, legislators expanded the 6% sales tax to 35 previously untaxed services, which critics say unfairly impacts low-income families, working-class Kentuckians, the poor, and seniors².

The tax cut is estimated to cost the state more than $1 billion every two-year budget cycle, which some argue should be reinvested in public education and other services that were cut following the 2008 recession².

Democratic Rep. Josie Raymond from Louisville has voiced concerns that the state might not have sufficient funds to meet its basic obligations, including public schools, Medicaid matches, prisons, and police officers. “It’s a real missed opportunity,” she said, suggesting that the funds could be better utilized in social services².

The state’s budget surplus has been buoyed in part by a substantial influx of federal aid during the coronavirus pandemic. But this aid is temporary, and critics worry that the state will not be able to rely on it to balance the budget once it phases out². Jason Bailey, executive director of the Kentucky Center for Economic Policy, criticized the decision to create a permanent tax reduction based on a temporary surplus from federal aid, calling it “ridiculous”².

While Republican lawmakers have justified the income tax cut by arguing it will make Kentucky more competitive with neighboring Tennessee, which has no income tax, critics point out that Tennessee relies heavily on a 7% sales tax. This reliance on sales tax results in a regressive revenue system, placing a heavier burden on lower-income households².

Instead of tax cuts, Raymond argues that the state could use other strategies to increase workforce participation, such as providing more protections for workers. “We’ve seen in other states this rush to cut taxes in an ideological place that actually doesn’t play out as they promise with business and population growth. Let’s try offering paid leave instead and get native workers in Kentucky,” she suggested².

As Kentucky continues to navigate the impacts of its income tax cut, these debates underscore the complex balancing act between short-term gains, long-term fiscal health, and the well-being of its citizens.