Working Kentuckians will notice a slight bump in their first paychecks of 2023, thanks to House Bill 8 from the 2022 legislative session, which puts Kentucky on a path to reduce its personal income tax gradually. This change took effect January 1, 2023, and lawmakers are expected to consider a similar measure this year that could reduce the tax by another half percentage point by January 1, 2024.
For Kentuckians earning $50,000 in taxable income, the result of a one percentage point decrease equals close to $500 per year added to their paycheck. If you earn more than that, the savings will increase proportionately.
The goal here is to allow Kentucky workers and small business owners to keep more of their hard-earned money so they may spend (or save) that money as they see fit. In addition to giving people more freedom over their finances, this policy is also a sound strategy for growing Kentucky’s population, workforce, and economy.
Growing our population and workforce is important. Growth means more workers, more families, more entrepreneurs and small business owners, more customers, and more revenues for public investments. Growth also means retention: fewer Kentuckians leaving home for opportunities in other cities or states. Tax policy plays a significant role in a state’s economy’s growth (or stagnancy).
Kentuckians living along our southern border see this every day. Tennessee has never had a state income tax but instead relies on a more consumption-based tax system to generate revenue for state services. Since 2001, Tennessee’s population has grown 21.4 percent, nearly double Kentucky’s growth in the same time frame. And the Volunteer state’s workforce has grown 17.9 percent vs. 2.8 percent in the Commonwealth. Of course, other contributing factors impact these growth figures, but tax policy is certainly an obvious advantage our neighbors hold to the south.
House Bill 8 provided a road map for Kentucky to gradually shift to a tax structure that relies more on consumption while maintaining investments in key public services like education, child care, and public safety. The individual income tax rate can only fall when the state meets targeted savings goals and revenue growth. Even then, the rate can only drop in half-percentage-point increments, and these reductions still require legislative approval. Just as lawmakers continued making key investments in education and pensions after reducing income tax rates from 6 percent to 5 percent in 2018, we can expect further investments in future budget cycles.
Over the past two years, dozens of other states – including our neighbors in Indiana, Missouri, and Ohio – have made similar efforts to lower income taxes to promote long-term population and workforce growth. Kentucky’s plan will ensure that we remain competitive as these efforts continue across the country.
For generations, Kentucky has relied on taxing the income earned by working Kentuckians and small business owners for most of its budget. At the same time, our state has fallen far behind states like Tennessee and far below the national average in population and workforce.
While change can be hard, it’s time for a new plan in Kentucky that will encourage more opportunities to keep more of our family members and friends from leaving while attracting new families to our beloved Commonwealth. Reducing our reliance on income taxes and letting working Kentuckians and small business owners keep more of what they earn is a key part of that new path forward.
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