FRANKFORT, Ky. — Kentucky’s business tax climate has officially moved into the top 20 most competitive in the nation, according to a new report by the Tax Foundation. The improved ranking reflects progress in reforming Kentucky’s tax code.
The Tax Foundation is a nonpartisan tax policy nonprofit. It annually produces an index ranking the competitiveness of all 50 states’ business tax climates. Rankings center on five factors:
• Individual income taxes
• Sales taxes
• Property taxes
• Unemployment insurance taxes
A higher ranking on the index suggests a tax code that supports economic growth and business attraction and expansion. A lower ranking suggests a tax code that is less effective in these regards.
Historically, Kentucky has not fared well in these rankings, especially in comparison to neighboring states such as Indiana and Tennessee. In 2017, for example, the Tax Foundation ranked Kentucky 34th, while Indiana and Tennessee sat at 8th and 13th, respectively.
Tax reforms passed by the General Assembly in 2018 and 2019, however, have helped improve Kentucky’s standing. With measures to lower and simplify individual and corporate income tax rates, changing the state’s income apportionment formula, and phasing out taxes on inventories, Kentucky has steadily moved up to 19th in the Tax Foundation’s newest rankings. Indiana now ranks 9th, while Tennessee ranks 18th.
High marks for both Kentucky and Indiana are good news for the prospects of business attraction and expansion, but much work remains to be done to improve the region’s business competitiveness, says Greater Louisville Inc. As the Tax Foundation notes, Kentucky has one of the worst unemployment insurance tax structures in the nation:
Conversely, the states with the worst unemployment insurance taxes are Massachusetts, Kentucky, Idaho, Nevada, and Virginia. These states tend to have rate structures with high minimum and maximum rates and wage bases above the federal level. They also tend to feature more complicated experience formulas and charging methods, and have added benefits and surtaxes to their systems.
In addition, local tax structures in Kentucky are severely outdated, and the state constitution places limits on the ability of local governments to enact reforms.
Addressing these deficiencies and others in Kentucky continue to be major priorities in future legislative sessions.