Proposal would take first step toward long-term phase out of state income tax

House Takes Next Step with Tax Modernization Proposal

FRANKFORT, Ky. (WTVQ) – House Appropriations and Revenue Chair Jason Petrie filed HB 8 Friday, which he says is the Republican leadership’s next step to making the state’s tax code more attractive for Kentuckians and individuals considering relocating to Kentucky.

And while eventually phasing out the state’s income tax, it would offset some of the lost revenue by expanding the state sales tax and some fees to items not currently taxed.

“Kentuckians, those here and those who will move here, recognize that what remains in your pocket at the end of a day’s work determines how you live. We have been very open about our goal to let people keep more of their hard-earned money rather than collecting it for the government to determine how to spend,” Petrie said. “Population growth is a necessary component of long-term growth in Kentucky and is affected substantially by our tax structure. It is also critical that we get more individuals into the workforce. We cannot continue to build our economy when more than 40 percent of those who should be working are not. HB 8 incentivizes both by allowing more of the fruits of their labor to remain in their pockets.”

HB 8 would lower the state’s 5% income tax incrementally over a period of years until it is eliminated. The first decrease would reduce the income tax rate an entire percentage point to 4% on January 1, 2023, leaving an estimated $1 billion in taxpayer pockets to be invested and spent in local communities. To accomplish the reduction, the House leveraged funding for constituent needs rather than insider wants in its version of the current budget.

“The House version of the budget meets our state’s needs, but we didn’t spend every dollar available. We reserved funds to take advantage of opportunities like tax modernization. As a result, we have a once in a lifetime opportunity to make long-term, generational change,” added Rep. Brandon Reed, the bill’s cosponsor and Vice Chair of the House Appropriations and Revenue Committee. “Lowering the income tax provides multiple benefits like leaving more money in our local communities. We’re also using this proposal as a tool to grow our workforce and improve the quality of life for all Kentuckians.”

Petrie added that HB 8 requires the state to meet additional revenue targets before additional rate reductions can occur. The thresholds, commonly referred to as triggers, are based primarily on organic increases in state revenues together with an expansion of the base of items subject to sales tax. Lawmakers used conservative revenue forecasts based on the work of the Consensus Forecasting Group (CFG) and available sales tax data to predict future state revenues.

“We are confident that state revenue will continue to support a 4% rate over time,” Petrie added. “However, we will see a greater benefit from eliminating personal income tax completely. This is where tax modernization comes into play. We know that broadening the tax base gives us an opportunity to lessen the burden. To put it simply, we all pay less when more people inside and outside the state pay.”

Petrie refers to provisions of HB 8 aimed at broadening the tax base to include extending the sales tax or a user fee to the following services as well as others listed in the bill:

–          Non-Primary Residential Electric (primary residences would remain exempt)

–          Taxi cabs, car rentals, or transportation services like Uber and Lyft

–          Temporary Rental Services (AirBnB, VRBO)

–          Advertising, Marketing, and Graphic Design Services

–          Residential and Nonresidential Security Systems

–          Bodyguard and Self-Protection Services

–          Process Servers

–          Valet and Parking Services

–          Pleasure Watercraft Docking

–          Entertainment Venues and Event Space Rentals

–          Legislative and Executive Branch Lobbying

–          Cosmetic Surgery Procedures (non-medically necessary)

–          Personal Financial Planning

–          Private Mail Services

–          Road and Travel Services

–          Executive Employee Recruitment Services

–          Unsolicited Telemarketing Services

–          Public Opinion Research

The measure also implements a battery reclamation fee on electric and hybrid motor vehicles and a tax on the use of fee-for-service charging stations. Revenue raised through these mechanisms would be earmarked for the state road fund and general fund.

HB 8 includes no reduction in the corporate income tax or the limited liability entity tax (LLET), nor does it include a rumored expansion of the sales tax to traditionally non-taxed items like groceries and medication.

“Building a strong economy today is how we afford the progress we want for tomorrow. To accomplish that, we must focus on policies that empower working Kentuckians instead of continuing with the status quo,” Petrie said. “After all, there is proof in the adage that if you want more of something, tax it less.”

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