Kentucky reports another record surplus. Will it lead to a third income tax cut?

by Liam Niemeyer, Kentucky Lantern

Kentucky brought in a record $15.1 billion in general fund tax revenue during the last fiscal year — the most ever — buoyed by a strong jobs market, increasing salaries and wages and continued industry profits, the state budget director’s office announced Monday.

Revenue in fiscal year 2023 exceeded budgeted expectations by about $1.4 billion, in line with what a state group of economists had predicted in December.

It was the third year in a row that revenue surpluses exceeded $1 billion despite the impacts of continued cuts to the state’s income tax rate, potentially setting the stage for a third income tax cut in as many years when the General Assembly convenes in January.

“General Fund revenues substantially exceeded the expectations used in putting together the budget for the third straight year,” State Budget Director John Hicks said in a statement. “The $15.1 billion in revenues also incorporated six months of a 10 percent individual income tax rate cut that went into effect in January 2023.”

The top-line numbers for fiscal year 2023, which ended June 30, were:

• Individual income taxes brought in $5.8 billion; $504 million more than budgeted.
• Sales and use taxes brought in $5.6 billion; $299 million more than budgeted.
• Taxes on corporations brought in $1.2 billion; $311 million more than budgeted.
• Property taxes brought in $744 million; $100 million more than budgeted.
• Coal severance taxes brought in $96 million; $20 million more than budgeted.
• Cigarette taxes brought in $299 million; $19 million less than budgeted.

The finalized budget surplus numbers won’t be known until expenditures for the fiscal year, which ended June 30, are completed at the end of July. 

Kentucky Senate Appropriations and Revenue Committee Chair Chris McDaniel, R-Ryland Heights, touted the revenue report as proof that “conservative fiscal policy will yield results.” 

“I’m very proud of what we’ve done, and what we will continue to do to try to make sure that we balance — and I think we’ve proven that we have — lower taxes with responsible administration of government,” McDaniel said. 

McDaniel said the report for the just-ended fiscal year “looks pretty good” to again reduce the income tax rate during the next legislative session. But he said that calculation would have to wait for revenue numbers to be certified later this year. 

A landmark tax law, House Bill 8, enacted in 2022, cut the state income tax from 5% to 4.5% — a reduction of 10% — and also set up a complex process in which the General Assembly could consider in each future year an additional cut of a half a percentage point so long as two conditions are met: The state’s reserve fund — known as the “rainy day” fund — must be at least 10% of total general fund revenues for the prior fiscal year. Revenue for the year just ended must have exceeded spending by at least the amount that it would cost to reduce the income tax rate by one full percentage point.

Some Republicans and the Kentucky Chamber of Commerce want to phase out Kentucky’s individual income tax altogether.

The GOP-dominated legislature passed legislation earlier this year approving a half-percent cut to the state’s income tax from 4.5% to 4%, pointing to the prior year’s robust revenue. That cut will go into effect at the beginning of next year.

One economic analyst saw a warning sign in the rosy economic report. Jason Bailey, executive director of the progressive Kentucky Center for Economic Policy, said the impacts of the income tax cut are becoming evident. The “withholding” category of state income taxes, the amount deducted from an individual’s paycheck, dropped by 10.2% in June 2023 compared to June 2022. 

“That’s what happens when you reduce the income tax rate,” Bailey said. “I think there’s some people who claim that lowering the rate will somehow spur new economic activities such that receipts won’t drop, and we’re not seeing that here.” 

If the legislature continues to cut the income tax, the next economic recession could blow a hole in state funding for education and other services in the budget, Bailey said. Meanwhile, he added, lawmakers could invest this surplus in areas of need such as shoring up public education and providing housing in disaster-struck areas of the state. 

Democrats in the legislature and other advocacy groups had echoed Bailey’s concerns when Republicans were moving to approve another income tax cut earlier this year. Democratic Gov. Andy Beshear ultimately signed the GOP-backed legislation approving the cut, a move that he said would provide short-term relief to Kentuckians facing inflation. 

As for the drop in income tax withholding, McDaniel, the Senate budget chair, said it was anticipated and that he isn’t “terribly nervous about that.” 

“The one group that I don’t hear complaining about the fact that they see their income taxes go down is everyday Kentucky citizens,” McDaniel said.

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Top photo credit: The Lexington Times