FRANKFORT, Ky. — Kentucky can expect a large revenue surplus of $1.4 billion when the current state fiscal year ends on June 30.
This is the forecast of a group of experts on Wednesday – called the Consensus Forecasting Group – which is charged with making official forecasts of income for budget purposes.
If the forecast proves close to correct, it will mark the third consecutive fiscal year in which tax revenues have produced a large surplus.
Also, if the forecast is correct, it could allow the Kentucky General Assembly to consider reducing Kentucky’s income tax rate under the tax bill known as House Bill 8 was passed by the legislature earlier this year.
As the astonishing rate of revenue growth in recent years has shown, it is difficult to predict how much tax money will end up in public coffers. Frank O’Connor, president of the weather forecasting group, pointed out on Wednesday that factors far from Kentucky – such as international events in Ukraine, China or elsewhere – can quickly throw off the “absurd” revenue forecast.
However, Wednesday’s forecast is made with confidence if the receipts for the first five months of the current fiscal year are in hand. And those receipts show strong growth.
Here are the key numbers from Wednesday’s forecast:
- In the current fiscal year (July 1, 2022 to June 30, 2023), revenues from the General Fund are expected to increase by 3.4% to $15.2 billion. This would produce a surplus of $1.44 billion over current budget requirements.
- In the next fiscal year (July 1, 2023 to June 30, 2024), revenue is expected to increase by 1.7% to reach $15.5 billion.
O’Connor, professor emeritus of economics at Eastern Kentucky University, said the forecast does not anticipate a recession in the next 18 months.
“It’s hoping that the economy will continue, not in a dramatic way but in a softer way,” O’Connor said. He said he was a bit more pessimistic than most members of the group.
The forecast refers to the loss of income as a result of the reduction of the income tax rate from 5% to 4.5% from January 1, which was in HB 8.
But that does not include the additional reduction in the income tax rate contained in HB 8’s provisions, which are likely to pass when lawmakers meet in regular session next month. .
Real Estate Act 8
The new law did not reduce the income tax rate from 5% to 4.5% starting January 1, 2023, but it established a complex process that allows the General Assembly to annually review the an additional reduction of half a percent. at the income tax rate if two conditions are met showing that the Central Fund had a strong financial health in the previous fiscal year. These conditions are:
- The balance in the government fund (often called the ‘rainy day fund’) at the end of the financial year is equal to at least 10% of the previous year’s income.
- The total income of the previous fiscal year exceeded the expenses of that previous year by at least an amount equal to the amount that would have been spent if the rate had been reduced by the full percentage. income tax.
Both measures were met at the end of the last fiscal year, allowing lawmakers to reconsider the January rate cut. If it does, the income tax rate will drop to 4% starting January 1, 2024.
Proponents of HB 8 say it’s a responsible way to gradually reduce income tax rates, making Kentucky more competitive with states with low or no taxes. enter at all.
They also hope that continued revenue growth a year from now will allow them to consider another rate cut (to 3.5% starting Jan. 1, 2025) when lawmakers convene. in 2024.
Wednesday’s forecast for revenue for the 2022-23 fiscal year suggests it might.
Republicans with majorities in both the House and Senate said Wednesday’s projections show Kentucky remains on strong fiscal footing. They say that the government can afford to reduce the income tax rate to 4% that it plans to pass in January.
Sen. Chris McDaniel, a Taylor Mill Republican who chairs the Senate Appropriations Committee, said of the new forecast: everything.”
McDaniel said he hoped, but wasn’t sure, that if predictions prove correct that lawmakers in 2024 would be able to reconsider half a percent of 3.5 percent. “There’s a lot that has to happen before the end of this fiscal year, so it’s too early to tell,” McDaniel said. But he said that since lawmakers created HB 8 with two safeguards to prevent a revenue collapse like what happened in Kansas a decade ago, he hoped the General Assembly would approve the rate cut. in the future when these protections are fulfilled.
But critics warn that a permanent reduction in the income tax rate to 4% next year based on the temporary good times, produced mostly by the federal economic stimulus policy, will have a detrimental effect on the state’s ability to fund public education and other programs in the not-too-distant future.
Jason Bailey, executive director of the Kentucky Center for Economic Policy, supports a more progressive tax system with higher income taxes and lower sales taxes.
Bailey said the expected surplus is a result of the legislature’s failure to properly fund key portions of the current budget including raising teachers, child care and housing and the emergency needs of weather disasters in the east and west.
He also warned that the legislature’s decision next month to cut the income tax rate to 4% will cost money. “If this reduction is approved, the revenue in fiscal year 2024 will not increase, but will decrease slightly,” Bailey said.
This article is republished under a Creative Commons license from the Kentucky Lantern, which is part of the States Newsroom, a network of newsrooms supported by grants and partnerships of fundraiser as a 501c(3) public charity. Kentucky Lantern maintains editorial independence. Contact editor Jamie Lucke with questions: email@example.com. Follow the Kentucky Lantern on Facebook and Twitter.
Tom Loftus is a native of Cincinnati and a graduate of The Ohio State University. His long career in Kentucky journalism included four years as Frankfort bureau chief for The Kentucky Post and 32 years as Frankfort bureau chief for The Courier Journal . He is a member of the Kentucky Journalism Hall of Fame and a freelance reporter for the Kentucky Lantern.