Kentucky bill proposes phase-out of personal income tax

A key House Republican has proposed phasing out Kentucky’s personal income tax — with a long-term goal of eliminating the levy — in a sweeping measure introduced Friday that would expand the tax state sales to a multitude of services.

The long-awaited tax overhaul measure was tabled by House Appropriations and Revenue Committee Chairman Jason Petrie, who said the goal was to promote strong and sustainable growth in the state.

Under the bill, the state’s 5% personal income tax rate would be lowered gradually over a period of years until it is eliminated, according to a press release from the House GOP leadership.

The first reduction would take place next January 1, when the rate fell to 4%, he said. The one percentage point cut would save Kentucky taxpayers about $1 billion.

“We’ve been very open about our goal of allowing people to keep more of their hard-earned money rather than collecting it for the government to figure out how to spend,” Petrie said. “Population growth is a necessary component of Kentucky’s long-term growth and is significantly affected by our tax structure.”

The bill would require the state to meet its revenue targets before further tax rate cuts occur.

The sweeping measure – House Bill 8 – did not include any state corporate income tax cuts.

To broaden the tax base, the proposal would extend the sales tax to a number of services. Among those targeted are car rentals and transportation services Uber and Lyft, rental services like Airbnb, and advertising, marketing, and graphic design services.

Other targeted services included in the bill include residential and non-residential security systems, bodyguard and self-protection services, process servers, valet and parking services, boat mooring yachting, entertainment venues and event space rental, legislative and executive branch lobbying, cosmetic surgery procedures (not medically necessary), personal financial planning, private courier services, road and travel services , executive search services, unsolicited telemarketing services and public opinion research.

Under the bill, groceries and drugs would remain exempt from state sales tax.

Another key provision would introduce a “battery recovery tax” on electric and hybrid vehicles and a tax on the use of chargeable charging stations. These revenues would go to the state road fund and the general fund.

Gov. Andy Beshear was not consulted by House Republicans on the proposal, his spokeswoman Crystal Staley said. The Democratic governor regularly touts Kentucky’s strong economic recovery from the COVID-19 pandemic, pointing to records set last year for job creation and investment.

Budget and fiscal measures will dominate the work of the final weeks of this year’s legislative session. The unveiling of the house tax measure prompted a swift reaction.

The Kentucky Chamber of Commerce, at the forefront of modernizing the state’s tax code, said it was encouraged by the bill’s introduction.

“Kentucky needs to be competitive, and significant changes to our tax code are a critical part of that equation,” said Kate Shanks, senior executive at the Kentucky Chamber. “We agree that cutting income taxes to put more hard-earned money back in the pockets of Kentuckians is essential to making Kentucky an attractive place to live and work.”

The Kentucky Center for Economic Policy, however, said the tax cuts proposed in the House bill were “heavily biased in favor of the wealthy.” He said the few “modest revenue increases” in the measure would not come close to offsetting the loss of income tax revenue. The result, he said, would be devastating to schools, health programs and other social services that rely on state funding.

When the House passed its version of the state’s next two-year budget last month, it backed increased education spending and a pay raise for state employees. But the amount of spending was less than Beshear had recommended, as Republicans left plenty of room to consider tax cuts. The Senate is reviewing the budget but has yet to release its version. Senators would also have the opportunity to put their stamp on any tax measure passed by the House. The GOP has supermajorities in both houses.

Beshear last week approved legislation to temporarily reduce the state sales tax rate to help protect Kentuckians from rising consumer prices. The bill proposes a one-year reduction in the state sales tax rate from 6% to 5%. The cut, if passed, would provide $873 million in tax relief for Kentuckians struggling with rising prices, the governor said.

On Thursday, a GOP-led Senate panel introduced a bill that would provide income tax refunds of up to $500 per individual and up to $1,000 per household. Senator Chris McDaniel said it would provide some relief from soaring inflation, adding it was “completely separate” from any general tax measures.

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