Home » Kentucky’s tax climate ranking holds steady among the top 20 best in the nation

Kentucky’s tax climate ranking holds steady among the top 20 best in the nation

The Bottom Line: by Charles Aull

Kentucky’s national business tax climate ranking holds steady as the Commonwealth and other states across the nation pass reforms to improve their overall tax competitiveness, according to a new national report.

Tax Foundation, a nonpartisan think tank focused on tax policy, ranked Kentucky’s business tax climate 18th in the nation in its annual State Business Tax Climate Index. This was the same ranking as last year – and roughly where the state has stood since 2019 – but a far cry from 2018 when the Tax Foundation ranked 37th.

The State Business Tax Climate Index looks at more than 120 variables across five major tax areas: corporate, individual income, sales, property, and unemployment insurance. The index scores state based on how effective their tax structures are at attracting new businesses and generating economic and employment growth. “The evidence shows that states with the best tax systems will be the most competitive at attracting new businesses and most effective at generating economic and employment growth,” the report states. “Taxes are indeed but one factor in business decision-making. Other concerns also matter–such as access to raw materials or infrastructure or a skilled labor pool–but a simple, sensible tax system can positively impact business operations concerning these resources.”

Thanks to reforms championed by the Kentucky Chamber and passed into law by state policymakers, Kentucky has steadily improved its ranking on the index. In 2018 and 2019, lawmakers enacted major reforms to corporate and individual income taxes. In 2022, lawmakers passed House Bill 8, which established in statute a careful plan to phase out Kentucky’s individual income tax gradually. Thanks to House Bill 8 in 2022 and House Bill 1 in 2023, Kentucky’s individual income tax will be just 4 percent as of January 1, 2024. Tax Foundation assessed Kentucky based on its current rate of 4.5 percent for this most recent report. Still, it noted, “This scheduled rate reduction [in 2024] will improve Kentucky’s score on the individual tax component in the future.”

As the report stresses, states do not enact tax code changes in a vacuum. As Kentucky has pursued the important work of tax reform, other states have taken steps to improve their business tax climates as well. Arizona, for example, moved up five places on the index from 19th to 14th due to changes to its individual income tax structure. Massachusetts went the other direction, falling from 34th to 46th after it enacted new taxes on high-income earners.

Looking at Kentucky’s neighboring states, Indiana was one of the top 10 states in the nation. Tennessee ranked 15th, while Ohio and Illinois ranked 36th and 37th, respectively. Missouri has been steadily improving its ranking from 19th in 2016 to 12th. Zooming out from our direct neighboring states, North Carolina ranked 9th, while Florida ranked 4th.

Tax reform remains the top public policy priority for the Kentucky Chamber, and the Tax Foundation has served as an important resource for both business leaders and state policymakers. In 2021, the Tax Foundation released a major report on Kentucky, highlighting key tax reform concepts for policymakers to consider.

Read more about the Kentucky Chamber’s recommendations for tax reform in its “2024 Legislative Priorities” publication and see “Kentucky’s Winning Strategy,” which outlines a pro-growth vision for Kentucky’s economic future, including competitive tax reform.

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