House affirms second income tax reduction
One of the top priorities during the first week of the 2023 regular legislative session for the Republican-led General Assembly was to continue a gradual shift away from Kentucky’s individual income tax. HB 1, sponsored by Rep. Brandon Reed, affirms the income tax reduction from 4.5% to 4.0% starting in 2024. The measure passed out of the House on a 79-19 vote.
This tax reduction was set in motion last session through HB 8, which established revenue triggers for the income tax to decrease over time. The goal is to eventually have a 0% income tax rate. The state met the first trigger as determined by the Department of Revenue in September, allowing the income tax to fall automatically from 5.0% to 4.5% effective January 1, 2023.
All future reductions require affirmative action by the General Assembly. HB 1 provides this affirmative action for the second reduction set to phase in next year. After being approved by the House, the Senate will consider the bill when legislators return to Frankfort in February.
Nine states currently have no income tax, with a handful of others set to phase out the tax as a whole by 2025. For those states that do levy an income tax, those funds account for nearly 40% of state revenues. Republican lawmakers believe the change will encourage more growth and allow Kentucky to be more competitive with neighboring states that have lower income tax rates, such as Indiana (3.23%), Ohio (3.99%), and Tennessee (0.0%).
Democrats, on the other hand, say the tax cuts are unsustainable and will ultimately hurt lower-income workers. Rep. Lisa Willner filed HB 111 last week, proposing higher income tax rates for individuals earning more than $100,000.
In addition to the income tax changes, last session’s HB 8 also expanded the state’s 6% sales tax to 35 services that were previously untaxed. Marketing services, photography services, recreational camp fees, parking fees and more are now subject to a 6% sales tax. HB 8 also expanded the motor vehicle rental license fee currently authorized in counties containing a city of the first, second, or third class to rentals of U-Drive-It, peer- to-peer car-sharing programs and transportation network services (Uber and Lyft) and clarified language that rentals through companies such as Airbnb and Vrbo are included in the transient room tax. These changes took effect January 1, 2023.