Updated: Senate passes KY income tax cut over Democrats’ complaints, sends to governor

Kentucky’s legislative GOP majority continues to move toward lowering the state’s income tax to zero, as the Senate voted overwhelmingly to pass a bill lowering the income tax from 4.5% to 4%.

The state income tax has already officially gone down from 5% to 4.5% based on legislation passed last session, but this year’s House Bill 1 would affirm the slide all the way down to 4%.

Republicans, who hold supermajorities in both chambers of the legislature, have made it their marquee bill this year. GOP leaders like Senate Appropriations & Revenue Committee Chair Chris McDaniel, R-Ryland Heights say that continuing to lower the income tax will help attract businesses and new residents, as well as allow Kentuckians to keep more money in their pocket.

Cutting the income tax is the top priority of the Kentucky Chamber of Commerce, an organization representing businesses across the state that’s also the most prominent lobbying group in Frankfort.

Pam Thomas, a former A&R committee staffer who is now a senior policy analyst with the Kentucky Center for Economic Policy, spoke in opposition to the bill in McDaniel’s committee on Wednesday morning.

Thomas said, as she and her organization have previously, that the tax cut was short-sighted and that the good economic conditions – most states now have strong budgets as a result of the overall market and federal spending – informing the legislature’s push could be temporary. A quick shift in the economy for the worse could force the state’s hand to cut important services, she argued.

“The cuts will be permanent. It’s really hard, as you know, when you cut something to go back the other way. The General Fund is going to lose over $1.2 billion annually when the cut from 5% to 4% fully phases in,” Thomas said.

Thomas said that amount is more than the $1.1 billion currently appropriated to fund higher education in Kentucky – “a huge hit,” she said.

“(The income tax) is 41% of our revenue. The really scary thing, honestly, is that there just aren’t a lot of places for them to go to raise revenue outside of the income tax if they keep on. There’s no way we could be like Tennessee because our economy is so very different. It just doesn’t work. I mean, honestly, they just don’t have anywhere to go,” Thomas said.

Thomas and others, like Kentucky Center for Economic Policy Executive Director Jason Bailey, have also characterized the tax cut as an unfair giveaway to rich Kentuckians while poor Kentuckians get very little, if any, relief based on an across-the-board percentage income tax cut.

Sen. Robin Webb, D-Grayson, recognized as one of the most conservative Democrats in Frankfort, said that she was voting no on the matter in part because it would disproportionately help rich Kentuckians as opposed to poor and working-class Kentuckians. She also said that it’s unwise to move toward zero income tax because Kentucky needs a diverse tax base.

“We all like tax cuts, but we’ve got to look at the diversification of our portfolio when it comes to taxes. I’m not totally convinced that this is the way to go,” Webb said.

Sen. Mike Nemes, R-Shepherdsville, responded to those criticisms during the A&R meeting by saying that poor Kentuckians don’t often pay income tax and that rich Kentuckians find ways to avoid taxation – so relief would be given to “the working people.”

“I never thought we would be explaining or defending lowering taxes to some people… I’m proud to lower taxes for working people, who always pay the taxes,” Nemes said.

Senate Majority Leader Damon Thayer, R-Georgetown, made a similar point on the Senate floor.

I’m wondering if it’s Groundhog Day. It sure feels like it. It’s the same old worn-out Democratic opposition… That’s the fundamental difference between us and them: they think it’s the government’s money first and we think it’s the people’s money first. This same old worn-out tripe is so overused,” Thayer said.

McDaniel said that while the opposition’s points about Kentucky not having some of the natural strengths of other income tax-less states – Florida’s tourism and Texas’s oil, for example – are valid, the bill takes those into account and tackles the urgent issue of attracting business to Kentucky.

“You have to recognize your own ecosystem, your own strengths, and then structure your tax code appropriately so that you can play on those,” McDaniel said. “… At the end of the day, the compelling narrative for the Commonwealth is if we’re going to attract and retain good, high-quality organizations that bring good, high-quality jobs, we have got to be more competitive on income tax policy. That’s where we’re headed.”

He and other Republicans claim that the appropriate safeguards have been put in place to keep Kentucky from mirroring Kansas, a state that quickly implemented drastic tax cuts only to be forced to slash services like public schools.

The conditions in the bill passed last year – House Bill 8 – that are required for further half-percent increment drops in the state income tax include:

  • That at the end of the fiscal year the actual revenues exceed expenses plus the dollar value of a 1% drop in income tax.

  • That the state maintains a Budget Reserve Trust Fund – also known as the ‘Rainy Day Fund’ – equivalent to 10% of the actual revenue drawn in a given fiscal year.

  • That the General Assembly vote to approve a drop in the income tax rate.

“We have built in a lot of triggers and a lot of controls… We’re not going to be Kansas. We’re not going to blow a hole in the side of the Commonwealth’s budget like they did, and this plan will prevent us from doing so. I’m absolutely confident of that,” McDaniel said.

Democratic Gov. Andy Beshear has not yet staked out a position on vetoing the bill, signing it into law, or letting it become law without his signature, according to Link NKY. The Republican-dominated legislature has shown in recent sessions that they have the numbers to easily override most of the governor’s vetoes.

“I dare him to veto this bill,” Thayer said on the Senate floor.