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POLICY INSIGHT
BEYOND THE NUMBERS

Kentucky Legislators Admit Plan to Eliminate Income Tax Doesn’t Add Up, Abandon Efforts

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Kentucky Speaker of the House David Osborne admitted in late May that state Republicans’ plan to eliminate the personal income tax doesn’t add up. He said the General Assembly will abandon its efforts to ratchet down the rate to zero — heeding warnings from the Kentucky Center for Economic Policy and other experts who said the move would lead to political and fiscal disaster.

The personal income tax generates 41 percent of the state’s revenue, but conservatives have been seeking to undermine it for years. In 2022, the legislature passed HB 8, which set in motion a series of phased-in cuts that would cut the state’s 5 percent income tax up to a half point per year. In 2023, they doubled down on the plan, passing a second bill that put into law the goal of eventually eliminating the tax.

With the rate having now fallen to 4 percent, the tax cuts are already costing the state $1.3 billion annually — more than it spends on its entire system of public colleges and universities. Wealthy Kentuckians have seen most of the benefit, with 65 percent of the tax cuts going to the richest 20 percent of people.

With elimination off the table, legislators announced a new target tax rate of 3 percent. In the past, tax-cut proponents have proposed partially offsetting the lost revenue by increasing sales taxes. The state has already expanded the sales tax to some new services, including parking, moving costs, repair services, taxi cabs, and family portraits, to cushion the blow of previous rate cuts. But that expansion was far too modest to replace the massive revenue losses from income tax cuts. All told, the state has now raised only $1 for every $18 lost by moving to a 4 percent income tax.

If lawmakers enacted a larger sales tax in the future, that would hurt working families and worsen inequality. Families with the lowest incomes already pay five times as much as wealthy Kentuckians in sales and excise taxes as a share of their income. Not only would families with low incomes see little to no benefit from cutting the income tax further, they would also end up paying even more for essential items like household products, clothing for their kids, and school supplies.