In January, Kentuckians will start paying less income tax after the Republican-led legislature passed a bill reducing the rate from 5% to 4.5%. GOP leaders have said they plan to cut taxes even more during next year’s legislative session, with hopes of eliminating the tax entirely in the future.

Lawmakers voted to lower the income tax after the state raised more taxes than expected in recent years, creating a historic surplus. But critics say this measure will hurt the state’s revenue-generating system and lead to sales taxes on essential goods.

Rep. Steven Rudy, a Republican from Paducah who is the House Majority Leader, said the policy would make the state more business-friendly and encourage immigration. the state.

“Everybody knows we need more workers and more residents,” Rudy said. “You’re going to see most of the growth in states that have low or no income taxes, and that’s what we’re aiming to get to zero percent. But we can’t destroy the general currency or do it overnight, and that’s why we set up a series of triggers. ”

Nine states have no income tax and two others will phase out the policy by 2025.

Kentucky Legislature passed the tax cut earlier this yearautomatically lowers the rate to 4.5% starting Jan. 1, and allows the Senate to consider lowering it even further if the state continues to add more taxes each year.

Lawmakers paid for the cuts, in part, by expanding the 6% sales tax to 35 previously exempt services, from cosmetic surgery to home appliance repair. .

Jason Bailey, executive director of the progressive-leaning Kentucky Center for Economic Policy, called the move “conscious.”

“The Legislature has two choices – either cut spending and cut the entire program, or dramatically increase the sales tax. It could hurt low-income families, working Kentuckians, the poor, the elderly,​​​​ but it will benefit the rich,” he said.

According to official estimates, the government spends more than 1 billion dollars every two-year budget cycle.

Critics say the money should return to the state budget, restoring cuts made to public education and other services in the decade since the recession. 2008.

Democratic Rep. Josie Raymond of Louisville said the state should use the money to invest in social services.

“The big fear is that we won’t have the money to do the basic duties of government like public schools and Medicaid games and prisons, police.” It’s a real waste of time,” he said.

Rudy said the Legislature is prepared to block further cuts if another recession occurs.

“We’ve built a safety net, and it’s called having a savings account. We are in a good place,” he said.

Kentucky currently has $2.7 billion in the Budget Reserve Trust Fund, which is known as “rainy day”.

It is estimated that the government will have another budget surplus this year.


Federal aid, inflation has increased the budget surplus

A massive influx of federal aid during the coronavirus pandemic has helped keep Kentucky’s economy afloat.

But the aid is not permanent. And critics say that when it stops, the state will not be able to rely on it to support the state budget.

Bailey said providing that assistance helped the state maintain a healthy balance.

“When people got those stimulus checks, extended food assistance, they spent it in the economy, generating sales revenue that helped support jobs. It had a greater impact on the entire economy,” he said.

Kentucky received $2.4 billion from the American Rescue Plan Act of 2021with an additional $1.6 billion for cities and counties government. Gov. Andy Beshear announced $162 million more in federal funding in June of this year.

A large portion of the money is earmarked for state unemployment insurance programs, water and wastewater infrastructure.

But the money must be allocated at the end of 2024 and expire at the end of 2026.

Bailey said the Legislature used federal money as a short-term boost while compensating for revenue.

“Most of them are gone, and will certainly be gone in the next couple of years. Creating a permanent tax cut based on having a one-time surplus through federal action is just ridiculous,” he said.


Tennessee model

Republican lawmakers justified the tax cut by saying it would make the state more competitive with Tennessee, which has no income tax except for stock dividends and interest.

Rudy debates the move to help attract workers to the state.

“There’s a real shortage of teachers, social workers, and part of that is because there’s a shortage of people in Kentucky who are productive, working citizens, and that’s what the tax cuts are all about.” income – to get people to move. here,” he said.

But Tennessee also relies heavily on a 7% sales tax, and the lack of a broad-based income tax makes up for it. the seventh most backward income system in the country, according to the progressive Center for Taxation and Economic Policy.

Raymond said there are other ways to increase worker participation in Kentucky, such as providing more worker protections.

“We’ve seen in other states the rush to cut taxes in ideological places that really don’t live up to their promise of business and population growth. Very difficult. Let’s try to offer paid leave instead of hiring native-born workers in Kentucky,” he said.

Kentucky’s next legislative session begins Jan. 3.

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