House Bill Could Eliminate Income Taxes

House Appropriations Chair Jason Petrie (R-Elkton) filed a measure on Friday that would reduce the amount of income taxes Kentuckians pay. House Bill 8 would lower the state’s 5% individual income tax incrementally over years if the state’s General Fund receipts met specific benchmarks. It could eventually eliminate income taxes in Kentucky while shifting more toward a consumption-based tax structure.

The first decrease would reduce the income tax rate to 4% on January 1, 2023. Petrie estimates the change will save taxpayers roughly $1 billion, and he expects Kentuckians to invest the extra money and spend it in local communities.

“Kentuckians, those here and those who will move here, recognize that what remains in your pocket at the end of a day’s work determines how you live. We have been very open about our goal to let people keep more of their hard-earned money rather than collecting it for the government to determine how to spend,” Petrie said. “Population growth is a necessary component of long-term growth in Kentucky and is affected substantially by our tax structure. It is also critical that we get more individuals into the workforce. We cannot continue to build our economy when more than 40% of those who should be working are not. HB 8 incentivizes both by allowing more of the fruits of their labor to remain in their pockets.”

The tax would decrease to 3.5% on January 1 following the fiscal year in which the total General Fund receipts exceed $13.75 billion. A one-half percent decrease would follow on January 1 after total General Fund receipts exceed $14.5 billion, $15.5 billion, $16.5 billion, $17.5 billion, $18.5 billion, and $19.5 billion, with the tax reduced to 0% on January 1 following the fiscal year in which the total general fund receipts exceed $20.5 billion. The General Fund received $12.8 billion in Fiscal Year 2021.

“We are confident that state revenue will continue to support a 4% rate over time,” Petrie said. “However, we will see a greater benefit from eliminating personal income tax completely. This is where tax modernization comes into play. We know that broadening the tax base gives us an opportunity to lessen the burden. To put it simply, we all pay less when more people inside and outside the state pay.”

House Bill 8 broadens the sales and use tax base by taxing additional services including:

  • Pleasure watercraft docking;
  • Transportation services, such as taxi cabs, car rentals, and ride-sharing services;
  • Valet and parking services;
  • Non-medically necessary cosmetic surgery procedures;
  • Body modification services, including tattooing;
  • Personal fitness training services;
  • Personal financial planning;
  • Advertising and graphic design services;
  • Temporary rental services;
  • Bodyguard and self-protection services;
  • Private mail services; and
  • Non-primary residential electric service.

House Bill 8 would not tax groceries or medicine, nor would it impact corporate income taxes. The House measure comes a day after Senate Republicans unveiled a plan to provide tax rebates of up to $500 for individuals or $1,000 for households.

Representatives overwhelmingly approved a constitutional amendment on Wednesday that, if approved by three-fifths of the Senate and a majority of the voters, would allow the General Assembly to consider comprehensive local tax reform in a future session. Representative Michael Meredith (R-Oakland) sponsored House Bill 475. The KLC top priority awaits a Senate committee assignment.