The 2022 Kentucky General Assembly is about one third of the way through its session and the House has already passed a state budget bill which usually happens much later in the session. Some view this as a positive sign for tax reform.
Any official move to alter state taxation originates in the House. The word “tax” in any piece of legislation often prompts significant scrutiny from lawmakers. But, this year, state finance documents show a large revenue surplus boosted by federal coronavirus recovery funds.
The surplus has created an environment where tax changes are being considered.
Louisville GOP Rep. Jason Nemes said members have been working on tax reform for a number of months. A primary emphasis is on lowering the state’s income tax and broadening the sale tax to other services. While a state like Tennessee has no income tax and a much higher sales tax, Nemes doesn’t see Kentucky going that route.
“So it will never be all sales and no income. There will be a variety of various taxes and there are also occupational taxes at the local level and I don’t think any discussion about removing those at this point. For the local taxation we’re talking about providing many more options,” said Nemes.
Nemes said Kentucky is a poor state and its citizens are over-taxed. He noted reducing taxes leads to growth overall and more revenues for education, municipalities, and welfare programs.
Louisville Democrat Joni Jenkins is the House Minority Floor Leader. She’s announced she will not seek re-election. In her 28 years in Frankfort, Jenkins said she has seen attempts at comprehensive tax reform. While saying it’s needed to fix an antiquated system, Jenkins worries the changes being considered in this year’s session won’t sufficiently meet education, corrections, and other state needs. She said a state earned income tax credit benefits working families.
Whatever might happen in the tax arena, Jenkins doesn’t expect a public unveiling or a bill soon.
“The Senate is in possession of the budget now and they don’t plan to move on it until March, so it seems like if we’re waiting to see how much reserve we have to be able to do tax reform, it’s something that’s not going to happen until much later in the session,” said Jenkins.
Jenkins said child-care advocates are lobbying for a $78 million dollars of additional support for the childcare system. Although not termed a tax break, she noted it would amount to that for businesses and working families.
Jason Bailey is head of the Kentucky Center for Economic Policy. He said 40% of the state’s revenue is found in income taxes, so lowering it can mean substantially less money. Bailey fears a drop in income taxes will, at some point, lead to an increase in the sales tax.
“And if you cut income taxes, what you’re doing is giving a big tax cut to the people at the top, the millionaires, people who make more. And when you shift over to sales taxes, which is what they’ll have to do eventually, as a result, you’re raising taxes on working-class people, the poor, middle-income Kentuckians who can least afford it,” explained Bailey.
Bailey said some states have acted to raise taxes on millionaires and closed corporate loopholes and tax breaks.
One organization supportive of tax reform is the Kentucky Chamber of Commerce.
Chamber Senior Vice President for Public Affairs Kate Shanks said citizens and businesses pay income taxes. She noted her group represents a variety of businesses and they favor driving down the income tax as much as possible and modernizing the sales tax to offset some of the revenue loss. “We aren’t looking to starve state government and to starve certain government programs that are so important in Kentucky. But, we want to create a code that is more competitive, that will create economic growth, attract people to our state. Population growth is incredibly important,” said Shanks.
Senate Majority Floor Leader Damon Thayer said the environment in Frankfort is good for tax reform. He added there’s general consensus, at least within the republican party, to move away from taxes on production and move toward taxes on consumption. “People getting a tax cut puts more money in their paycheck, if you move the current tax rate from five down to three percent, they’re going to have more money in the paychecks, for example, to purchase items that then they would probably be paying a tax on or more of a tax on to make up the downturn in general fund receipts,” said Thayer.
If changes in the Kentucky tax code are made, it would be the third time over a four-year period. The 2018 measure lowered the state income tax from six to five percent and expanded the sales tax to services like car repairs, landscaping, and pet grooming. As the General Assembly nears the end of this year’s session in March, we should know whether more tax changes make it into law.
