A breakdown of state income tax cuts and why the parties disagree

Discussion continues between lawmakers regarding the Kentucky state income tax
Published: Jan. 4, 2023 at 5:50 PM EST
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Ky. (WBKO) - Kentucky’s bordering states like Tennessee and Indiana do not have a state income tax.

RELATED: Kentucky’s sales tax changes

Kentucky Republicans have a goal to cut the state tax, now at 4.5 percent to zero percent within a decade.

“Reducing income taxes has always been a long-term priority for Republicans,” said Dr. Jeff Budziak, Associate Dean of Potter College of Arts & Letters/Associate Professor with the Department of Political Science at WKU.

As of the new year, state income tax was sliced from five percent to 4.5 percent. Now, republicans plan to propose a second cut that would make the income tax at four percent.

House Bill 8, which became law after the General Assembly overrode the governor’s veto, added 35 different categories of services that are subject to the state’s sales and use tax.

“This will allow people to be able to decide what they want to do with their money. But oftentimes it goes back to the economy,” said Rep. Steve Riley, R-Glasgow.

However, the cuts have some opponents concerned. As a result of the income tax cut, taxes elsewhere on other goods and services have increased. Democrats say this is unfair to lower-income individuals.

“You’ve seen some things like photography services, tattooing services. If the tattoo costs $100, and there’s a 2% tax on it, you’re gonna pay $2, whether you’re relatively limited in means, or whether you have a lot of means,” explained Budziak.

Meanwhile, republicans say cutting the income tax allows the people to keep the money they earn in their pockets.

Riley says the cuts are only proposed when certain thresholds are reached.

“If the state revenues reached a certain level or above that level, that could trigger the state income taxes to go down a half a percent,” he said.

Rep. Kevin Jackson, R-Bowling Green, says he believes cutting the state income tax will attract more workers to the state of Kentucky, and Bowling Green specifically.

“We’ve got to have people that are going to fill those positions. If we can get down to, you know, low or no personal income tax, I see an opportunity to attract new people to Kentucky, and have them work at some of these jobs that we’re going to have available in the Bowling Green area,” he said.

On the other hand, opponents of cutting the income tax are concerned that the cuts will jeopardize funding for social services, including education and Medicaid.

“This move disproportionately benefits the state’s highest earners and will jeopardize future investments in schools, health, housing and other needs across the commonwealth. It also spends money that could be used on transformative investments in KY’s future,” said the Kentucky Center for Economic Policy in a Facebook post.

Ultimately, the position you take on the topic is really based on whether you favor private choice or government support.

“Do we want more government or more of the kind of kind of private choice, Republicans have historically been favorable to private choice, Democrats tend to be more favorable to the government providing those kinds of support services,” said Budziak.

The republican supermajority is confident the new cut to four percent will pass early in this session.

The reason this topic is coming up now is that the state budget is quite strong after federal funding during the pandemic.