Kentucky fails to meet fiscal trigger to allow for another income tax cut

Published 10:30 am Tuesday, September 5, 2023

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By Liam Niemeyer

Kentucky Lantern

Kentucky Republicans’ goal of gradually eliminating the state income tax has met an obstacle of their own making.

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State tax revenues failed to meet a fiscal requirement set by the GOP-controlled legislature in order to consider further income tax cuts during next year’s legislative session, according to a letter from the state budget director.

The General Assembly in 2022 enacted a landmark tax law that established two benchmarks that must be met before state lawmakers can cut the income tax rate by a half percentage point.

Some Republicans and the Kentucky Chamber of Commerce want to completely phase out Kentucky’s individual income tax in the future, while Democrats in the legislature and some advocacy groups warn such cuts could lead to major budget holes.

Republican gubernatorial candidate Daniel Cameron on the campaign trail last Thursday reiterated his support for eliminating the income tax, while Senate budget chair Chris McDaniel said Republican lawmakers would practice “spending restraint” in an effort to achieve future income tax reductions. Democratic Gov. Andy Beshear, running for reelection, warned that ending the income tax would require a huge increase in the sales tax and cuts to education and health care.

HB 8 in 2022 cut the state income tax rate from 5% to 4.5% and also set up the complicated process involving two fiscal requirements that would trigger legislative consideration of an additional cut of a half a percentage point.

Those two fiscal triggers are:

  • The state’s reserve fund — known as the “rainy day” fund — must be at least 10% of total general fund revenues for the prior fiscal year.
  • Tax revenue for the fiscal year that just ended must have exceeded state spending by at least the amount that it would cost to reduce the income tax rate by one full percentage point.

Those fiscal triggers were met for fiscal year 2021-2022, and Republican lawmakers earlier this year approved another cut of the income tax rate from 4.5% to 4%.

In the most recent fiscal year, the state’s “rainy day” fund had easily surpassed 10% of total general fund revenues. But State Budget Director John Hicks in an Aug. 14 letter to state legislative leaders said state tax revenues failed to meet the other fiscal requirement by nearly $435 million.

McDaniel, R-Ryland Heights, chairman of the Senate Appropriations and Revenue Committee, told the Lantern on Thursday that he believes the trigger not being met is a “successful implementation of policy” that balances a desire to lower the income tax with recognizing the need to fund government services.

McDaniel said although the fiscal trigger not being met means the legislature wouldn’t cut the income tax rate in next year’s regular session, Kentuckians can expect “spending restraint” that would allow for the legislature to meet the fiscal trigger in the future and cut the income tax rate again.

“We do not need to spend every dollar that rolls into Frankfort,” McDaniel said. “The restraint that we will need to show will pay off when we’re able to further reduce income taxes.”

He said he doesn’t expect the legislature to make spending cuts to government services next year when lawmakers craft the state’s two-year budget, though there may be “frozen” funding levels for some services.

“I don’t see us cutting any place in my estimation,” McDaniel said.

Yet the progressive research group Kentucky Center for Economic Policy, which has strongly opposed the income tax cuts, said in a press release that trying to meet the fiscal trigger for an income tax cut in the future would require shrinking “an already austere budget even more.”

“Failing to meet the trigger at a time when it’s easiest to do so because of national economic conditions should send a clear message,” said Jason Bailey, the executive director for KCEP. “It’s time to put a halt to further cuts and focus on the education, health and infrastructure investments communities must have in order to thrive.”

The center’s release stated cutting the state’s income tax is incredibly expensive because it makes up a large portion of the state budget, and the failure to meet the tax revenue trigger comes during a time of low unemployment and inflation, which generally should increase tax revenues.

Beshear said in a news conference last Thursday the economy is still “booming” and that Kentuckians “don’t have any worry” about why the fiscal requirement wasn’t met.

Beshear also criticized Cameron, saying that eliminating the state income tax would require a “massive” increase in the state’s sales taxes including on food and medicine — which he claimed is something Cameron would do — along with cuts to funding for education and health care.

“You cannot go to zero income tax, like Daniel Cameron has pushed, without either a massive sales tax increase — which is what he would do — or the gutting of K-12 education, higher education and health care coverage for millions of Kentuckians,” Beshear said.

Cameron in a campaign stop in Greenup County last Thurday said he plans to work with the legislature to get the income tax rate “to zero as quickly as possible.” While Cameron has repeatedly touted the elimination of the income tax, he has not explicitly said how he would achieve that.

Sean Southard, communications director for Cameron’s campaign, in a statement said Beshear was “lying” about Cameron raising sales taxes to eliminate the income tax. Southard didn’t directly answer how Cameron plans to achieve the elimination of the income tax.

“Under a Cameron Administration, we will grow the economy and attract more workers to expand the tax base in Kentucky,” Southard said.

McDaniel said Beshear’s comments on the income tax rate “smacks of both desperation and political opportunism,” pointing out that Beshear had vetoed HB 8 in 2022 that set up the process to cut income taxes but signed into law this year the latest income tax cut when it was “politically advantageous.”

“There’s been no consistency from this administration regarding these reductions,” McDaniel said.

In his 2022 veto message of HB 8, Beshear said in part that such income tax cuts could harm Kentucky’s economy in the future and referenced how Republican lawmakers in Kansas decided to roll back income tax cuts after facing a $900 million budget hole in 2017.

When Beshear signed the latest income tax cut earlier this year — bucking concerns from fellow Democrats in the legislature — he said he wished sales taxes would have been reduced instead, but he believed the income tax cut would provide financial relief to Kentuckians dealing with inflation.

McKenna Horsley contributed to this story.