BY REPRESENTATIVE BOBBY MCCOOL
Before I begin this week’s legislative update, I want to thank everyone who took the time to complete my legislative questionnaire. As I read through the responses, I noticed that someone asked, “Why do we want to lower income taxes?” and thought I might answer it in this column. The fact is, there are plenty of reasons this is a good strategy for our commonwealth.
As you may know, Kentuckians saw their individual income tax drop from 5% to 4.5% on Jan. 1 of this year, leaving an estimated $625 million in the paychecks of Kentuckians throughout the commonwealth. The cut is the result of HB 8, passed by the legislature in 2022 despite a veto by Governor Beshear.
HB 8 established the framework for the individual income tax to be cut in half a percentage point increments until it is eliminated entirely. The measure sets a series of triggers that must be met before the legislature can approve an incremental cut. Those triggers exist to protect necessary funding for state programs that serve Kentuckians and are based on state revenue, economic forecasts, and the state’s budget reserve trust fund. The next cut, to 4% as of January 2024, has already been triggered and the House voted to approve the cut during the first part of this year’s session.
Eliminating the income tax does require, at least in part, moving to a consumption-based economy to gain revenue. To put it simply, consumption-based taxes are attached to an individual’s choice to purchase an item or use a service. The legislature chose to levy the sales tax on services like lobbying, personal security, short-term rentals like VRBO and Airbnb, and cosmetic surgery procedures that are not medically necessary. These changes are estimated to bring in approximately $69 million in new revenue – a fraction of the estimated $625 million that Kentuckians will keep as a result of the 2023 income tax cut. It is also important to note that necessities like groceries and medicine remain tax exempt.
So, why target the individual income tax? First, it benefits working Kentuckians. To paraphrase President Calvin Coolidge, people should work more for themselves and less for their government. By cutting the income tax, individuals keep more of their hard-earned money and choose when and how to save, invest, or spend it in their communities. It is this kind of spending that strengthens local economies, grows independently owned businesses, and benefits communities.
Second, it is proven to help grow the economy and we know it works. Lawmakers lowered the income tax from 6% to 5% as part of the first tax reform package passed by the new conservative majority in 2018. As a result, our commonwealth saw record-low unemployment, historic investments, and was on track to shatter revenue records when pandemic shutdowns hit in 2020.
For more evidence, let us compare two states: Kentucky and Tennessee. Tennessee’s tax structure is based on consumption and not income. The median income in Tennessee in 2019 (pre-COVID) was almost $4,000 higher than ours. Equally interesting, Tennessee’s poverty rate is 25% lower and the percentage of their population on Medicaid is 11% lower. To put a human face on the contrast, consider that, despite having 2.5 million more people, Tennessee actually has fewer children in their foster care system. While some may cite Tennessee’s place as home to the country music industry, that industry and others – including healthcare, banking, and tourism, have grown there because of government policies – including taxes.
The third “why” is simple, people choose to live where tax structures benefit them and their families. In a tight labor market like we are experiencing today, taxes can help recruit workers. According to Census figures, approximately 700,000 people left California in 2021 and 2022. They left for a simple reason – they were overtaxed and over-regulated and it was simply too expensive to live there anymore. Californians pay an income tax ranging up to 13% depending on income and where they live. Many have moved states like Texas, where no individual income tax exists. Also, despite being among the most taxed states in the nation, California has a $25 billion deficit. Comparatively, Texas has a $30 billion surplus.
Ultimately, it boils down to this: if you keep doing what you’ve been doing, you’re going to keep getting what you’ve been getting. Our commonwealth ranks far too close to the bottom on indicators of health, wealth, education, and happiness. This is an incredible place, but we have great potential that has gone untapped for far too long. Kentuckians deserve better.
As always, I hope you will feel free to contact me with any questions or issues. I can be reached through the toll-free message line in Frankfort at 1-800-372-7181. Please feel free to email me at Bobby.McCool@lrc.ky.gov. If you would like more information about the legislature, you can visit the Legislative Research Commission website at legislature.ky.gov.
