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Kentucky Families Stand to Lose From Proposals to Cut Taxes and Public Benefit Programs

| By and Coty Novak

Lawmakers in Kentucky are weighing harmful tax and budget policies that would impose serious damage to education, health care, and other vital services, while making it harder for low-income people and communities of color to access public benefits and economic opportunity. Kentucky lawmakers looking to bolster quality of life, advance racial and economic equity, and put the state on a firmer path to prosperity — in rural and urban communities alike — should reject these measures, and instead adopt an approach that centers the needs of that state’s families and communities.

The first measure, House Bill 8, calls for a costly personal income tax cut that would overwhelmingly benefit the wealthiest Kentucky households. It would also critically undermine the state’s revenue system by phasing out the state’s personal income tax entirely over time, leaving the state under-resourced to finance public services everyone in the state relies on.

The bill, which passed the state’s House of Representatives and is before the Senate, is the latest in a series of harmful tax cut proposals around the country. It would lower Kentucky’s income tax rate from 5 percent to 4 percent for 2023, with further reductions that would take effect automatically once the state hits certain revenue targets. In two to three decades Kentucky’s income tax would likely be eliminated, with no real plan to replace the lost revenue or soften the blow to public services.

Small items in the bill meant to partially offset the revenue loss — such as increased sales tax on cosmetic surgery and interior decorating services — wouldn’t generate much. Such increases would only raise $58 million in the first year, while income tax cuts would cost the state $530 million, the legislature’s fiscal analysis shows. By 2024, the net revenue loss would climb to $902 million, according to the legislative fiscal note — roughly as much as the state’s general fund currently provides to public universities.

By 2035, the bill would cost Kentucky 17 percent of its general fund revenue — about as much the state spends on Medicaid – the Kentucky Center for Economic Policy estimates.

This revenue loss could come on top of nearly $1.2 billion in one-time revenue that may be lost through the tax rebate proposal in Senate Bill 194. That proposal is structured so that only households that earned enough to owe income taxes would get the rebate. But due to Kentucky’s non-refundable low-income tax credit, people with incomes below the poverty line don’t pay income taxes, and those just above the poverty line pay a small amount. So, the Kentuckians struggling the most to make ends meet and who pay other Kentucky taxes and fees, such as sales taxes, would get no relief at all. That bill has passed the Senate and is awaiting action in the House.

Most of the gain from the income tax cut in House Bill 8 would flow to those already doing very well. According to an Institute on Taxation and Economic Policy analysis, the top 1 percent of Kentuckian income-earners would see a cut of about $11,000 per year from the initial income tax cut, on average, while the bottom 60 percent would see an average cut of $256 per year. As the tax rate falls, the difference would multiply: with an elimination of the income tax, the top 1 percent would save an average of $55,249 per year in today’s dollars, while the bottom 60 percent would save an average of $1,271 per year, with lower-income people receiving much less.

Such a tax cut would result in drastic long-term cuts to services including infrastructure, health care, human services, and education, as revenues fall further and further below what’s needed to maintain public services or make investments that broaden Kentuckians’ access to opportunity. (Tying the elimination of the income tax to arbitrary revenue targets is simply window dressing — ultimately Kentucky would be ending a critical revenue source that is needed to support core public services.) This proposed tax cut would particularly affect lower- and middle-income people who cannot afford expensive private services to fill the gaps.

Additional measures moving through Kentucky’s legislature would layer on additional harm, especially for low-income families, people of color, and communities where policymakers have historically disinvested, including many rural places such as mountain counties in eastern Kentucky.

House Bill 7 would place additional restrictions on eligibility for Medicaid services and SNAP benefits. That would likely deprive tens of thousands of low-income Kentuckians of health care and food access in a state that already has significantly higher food insecurity than the national average, and risk rendering more Kentuckians uninsured by making it harder to enroll in and maintain Medicaid.

House Bill 4 would cut the number of weeks that job-seeking Kentuckians can claim unemployment benefits. This means when someone loses a job in Kentucky, they would have access to as few as 12 weeks (and only as many as 24 weeks) of jobless benefits, compared to the standard 26 weeks available in most states, including in Kentucky now. Cuts to unemployment benefits in other states have not boosted employment or labor force participation. Unemployment insurance recipients are required to actively look for work, and cutting off benefits sooner makes it more likely that households in which someone experiences a temporary period of joblessness will face hardship and possible financial ruin.

This dual assault on the state’s revenue system and public support programs points Kentucky in the wrong direction. Cutting income tax rates won’t boost Kentucky’s economy or attract new residents. Low tax rates don’t meaningfully influence people to move across state lines, and Kentucky’s taxes are already quite low. Kentucky’s flat 5 percent income tax rate is already lower than or equal to that of 28 other states plus the District of Columbia, and per-capita combined state and local taxes in Kentucky in 2019 were $4,198, the tenth lowest in the country.

Kentucky is being held back by its legacy of disinvestment in public services that help communities thrive. A well-educated population, for example, has been linked to higher earnings and lower unemployment — in Kentucky and nationwide — yet the state has the sixth-lowest number of high school diploma holders and fourth-lowest number of bachelor’s degree holders in the country. And, a rich body of research finds that policies that provide economic and health security, such as low-income tax credits, food assistance, and affordable health coverage, can help states prosper, in part by removing barriers to economic participation.

A more competitive Kentucky would be better-educated, better-fed, and healthier. To grow its economy and make it more equitable, the state should prioritize investments in education and health care, and maintain reliable access to Medicaid, SNAP, unemployment insurance, and other supports. But that’s impossible if Kentucky rips a $900 million hole in its budget with a tax giveaway to its richest residents, or if it undercuts access to economic and health security programs.

Lawmakers committed to cutting taxes could look at more targeted and effective tools that encourage and enable meaningful economic participation by more families and communities, such as creating a state earned income tax credit and child tax credit. These targeted policies, alongside investments in programs and services that enhance economic opportunity and advance racial justice, would lower barriers for lower-income people and historically excluded communities. By protecting programs and revenue rather than cutting them, lawmakers can build a more prosperous future for Kentucky.