Legislative Update With Rep. Michael Meredith: Proposed Income Tax Elimination

by: Rep. Michael Lee Meredith:

Before leaving Frankfort last week, I had the opportunity to vote for legislation that lays the groundwork for eliminating the state’s personal income tax, leaving more than $1 billion in the pockets of the people who work hard to earn it. The measure, HB 8, is the next step in our commitment to growing the state’s economy by making the state’s tax code more attractive for working Kentuckians and individuals considering relocating to Kentucky. I am glad to see us take this step because lowering the income tax provides multiple benefits like leaving more money in our local communities.
 
Now, for the details. HB 8 would lower the state’s 5% income tax incrementally over a period of years until it is eliminated. The first decrease would reduce the income tax rate an entire percentage point to 4% on January 1, 2023. That cost would be covered by funding set aside in the version of the budget passed by the House earlier this session. (HB 1). While the first decrease is automatic, HB 8 requires the state to meet additional revenue targets before additional rate reductions can occur. Commonly referred to as triggers, the thresholds are based primarily on state revenue levels. Lawmakers used conservative revenue forecasts based on the work of the Consensus Forecasting Group (CFG) and available sales tax data to predict future state revenues.
 
To ensure there is enough revenue to trigger further decreases, HB 8 shifts the revenue burden to consumption based taxes that are paid by those who visit the state as well as those who live here. It extends the sales tax or a user fee to the following services as well as others listed in the bill:
-          Non-Primary Residential Electric (primary residences would remain exempt)
-          Taxi cabs, car rentals, or transportation services like Uber and Lyft
-          Temporary Rental Services (AirBnB, VRBO)
-          Residential and Nonresidential Security Systems
-          Bodyguard and Self-Protection Services
-          Process Servers
-          Valet and Parking Services
-          Pleasure Watercraft Docking
-          Entertainment Venues and Event Space Rentals
-          Legislative and Executive Branch Lobbying
-          Cosmetic Surgery Procedures (non-medically necessary)
-          Personal Financial Planning
-          Private Mail Services
-          Road and Travel Services
-          Executive Employee Recruitment Services
-          Unsolicited Telemarketing Services
-          Public Opinion Research
 
HB 8 also includes a tax amnesty program, essentially a window of time that those who owe taxes can pay their bills without penalty. We expect the amnesty program bring in more than $200 million in taxes already owed to the state. The measure also implements a battery reclamation fee on electric and hybrid motor vehicles and a tax on the use of fee-for-service charging stations. HB 8 earmarks revenue raised through these mechanisms to the state road fund and general fund. 
 
We have heard a lot of talk over the past couple of months about giving one time bonuses or refunds for specific groups. While I know it may win political points, I believe Kentuckians should keep more of their money and pay the state less in the first place. After all, it isn’t how much money you make, but rather how much you take home that determines your quality of life.
 
Modernizing our tax structure also includes dealing with our state’s antiquated local tax system. The Kentucky Constitution, enacted almost 130 years ago, allows local governments to levy taxes but limits what can be taxed based on the economy of 1891. As a result, local governments are forced to levy personal income taxes through the occupational tax, business income taxes through the net profits or gross receipts tax, property taxes, and franchise fees. This is not only harmful to economic development efforts, but also prevents legislators from extending to local governments the flexibility to tailor their local taxation policies to meet their community’s specific needs. HB 475 passed in the House on February 23 and would allow Kentucky voters to decide if they want local governments to have the ability to modernize their tax systems to allow revenue to be realized through more competitive taxes. If a constitutional amendment passes, the legislature would still have to pass legislation that determines which options local governments may have.
 
Before I close, I want to remind you that the tax modernization bill we passed last week would not have been possible if we had not already approved our version of the budget. That proposal, HB 1, includes record funding for education, a continued commitment to the state’s budget reserve trust fund, and pay increases for the Kentucky State Police, state employees, social workers, and educators.
 
All three bills are now in the Senate for consideration. While they may make changes, I am optimistic about these measures passing into law.
 
As always, I can be reached here at home anytime, or through the toll-free message line in Frankfort at 1-800-372-7181. Feel free to contact me via email at Michael.Meredith@lrc.ky.gov. If you would like more information, please visit the LRC website www.legislature.ky.gov.