Kentucky Reduces the Income Tax Rate
This week the Kentucky Legislature passed House Bill 1 (HB 1) reducing the Income Tax rate in Kentucky, and today Governor Beshear (D) signed it into law.
To understand the context, we need to go back a few years. Before the Legislature could lower taxes, they apparently had to raise them. Kentucky used to have a socialist tax system where different income strata paid different rates. However, they passed a bill that set everyone's tax rate at a flat 5% starting in 2018. This change drastically increased taxes for most people while reducing them for a few. Then, another tax increase came along, adding a sales tax to many services in Kentucky. Both measures were signed into law by then-Governor Matt Bevin (R).
The concept seems to be to build up enough of a buffer in tax revenue while gradually lowering the tax rate every year, eventually transitioning to alternative forms of taxation, like a sales tax. If the analysis indicates it would allow for a balanced budget per the Kentucky Constitution, the Legislature will propose a half-percent decrease in a given year. Unfortunately, many are concerned that with the expanded sales taxes, and even with reductions in the income tax rate, the income tax may never be entirely eliminated. Depending on where the final number lands, it may still be an overall increase in taxes for many Kentuckians compared to several years ago.
Fast-forward to this legislative session: Representative Jason Petrie (R), chair of the House Appropriations and Revenue Committee, filed HB 1 to continue the effort of reducing Kentucky's income tax rate by half a percent. During the floor discussion on HB 1, an amendment by Representative Steve Doan (R) was briefly raised. This amendment aimed to set specific dates for reducing the income tax to 0%. However, after reviewing the session video, it appeared that House Leadership coordinated an effort to rule Rep. Doan's amendment out of order, citing its unconstitutionality. Rep. Doan was interrupted mid-sentence, and everyone read from a script, ruling the amendment unconstitutional. Anyone who has watched what goes on in Frankfort for any length of time knows that leadership will rule anything they don't want as unconstitutional and anything they want as constitutional, even though we all know that is not the case.
After reviewing Doan's amendment and the pertinent sections of the Kentucky Constitution, it does appear that Doan's amendment may have been unconstitutional. However, they could have done him the courtesy of letting him speak for his constituents before so rudely cutting him off. There are two reasons I think leadership was ultimately right in ruling Doan's amendment unconstitutional: One, the date he chose to make his first rate reduction was retroactive, which would impact the balanced budget requirement; and two, since this was a non-budget year and his amendment would impact the budget, Doan did not provide a financial impact note on his amendment. But here is where we have a problem: it appears, at least according to the paperwork filed, the House also voted on HB 1 without a timely filed financial impact note.
Here is the order of events:
- HB 1 was filed on 1/7/2025
- Voted out of Committee on 1/8/2025
- Passed in the House on 1/9/2025
But the Fiscal Note was not filed until 1/10/2025 (see pic below).
So, while House leadership was ruling Doan's amendment unconstitutional for not having a fiscal note on how his amendment would impact the budget, the entire House apparently voted on a bill that would impact the budget in a non-budget year without a fiscal note. One would hope that everything was handled in the interim and that most of the details were ironed out, and this was just a rubber-stamping process on something most everyone had come to a consensus on. But how are we, as citizens, to know this with improper filings like this? How are we supposed to have proper access to information that our elected representatives are voting on?
This is the problem in Frankfort. It seems no one knows what they are doing, from leadership to liberty legislators. Leadership runs roughshod over the rules and constitution, and even our own liberty advocates file bills that leave themselves open to being shot down on technicalities. Good thing we have the Senate; maybe someone in the Senate can catch this error, rectify it, and get the income tax reduced to 0% the right way.
So, what happened in the Senate? Senator Gex Williams (R) filed an amendment to HB 1 that properly timed out the implementation of reducing the tax rate to 0% and did have a fiscal note of sorts, as it was considered indeterminate on the impact of the budget. However, at least his amendment gave time to address budgetary concerns in the next session. It is understandable to not want to have an unbalanced budget, but we need to start setting hard goals and figuring out how to get there, not kicking the can down the road each year and hoping we get there. Unfortunately, Sen. Williams withdrew his amendment, gave a nice speech, and encouraged everyone to vote yes on HB 1. And here we have another problem with Frankfort: politicians that speak a good game but lack the backbone to actually hold leadership and colleagues accountable to do the right thing.
So, now we have a Democrat Governor who actually signed HB 1 into law, and he's on social media crowing about it like he was the one responsible for lowering our taxes and taking potshots at President Trump over the price of eggs due to preexisting bird flu conditions. What baby steps like this do in tax reform is allow everyone in Frankfort to take a bow every year, taking credit for doing something for you without really accomplishing anything substantive.
At this rate, we are looking at maybe 10 years to get the tax rate in Kentucky to 0%. However, the powers that be in Frankfort do not have a plan to get us below 3.5%, the ARPA funds from COVID are running out, and they continue to increase spending.
Below are the videos from the House and Senate Chambers.
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