FRANKFORT (AP) — House Republicans voted Friday to fundamentally change Kentucky's tax code, passing legislation aimed at phasing out individual income taxes while extending the state sales tax to more services.
The ambitious tax plan cleared the House on a 67-23 vote after a long debate, bringing GOP lawmakers closer to achieving a long-running policy goal. It would shift tax collections increasingly toward personal consumption and away from personal income.
The bill moves to the Senate next as tax and budget issues rise to the forefront in the legislative session's final weeks. Republicans have supermajorities in both chambers.
Supporters trumpeted the tax proposal's far-reaching changes. They predicted it would fuel economic growth and population gains by enabling people to keep more of the money they earn.
“Stop the old thought process — tax it, spend it," said Rep. Jason Petrie, the bill's lead sponsor. "We had a good 100-year history of that here. And our numbers and our results are not appealing at all.”
Democrats opposing the measure said it would disproportionally benefit wealthier Kentuckians and risks depriving the state of revenues to properly finance schools and other essential services.
“I don’t think the math adds up,” Democratic Rep. Rachel Roberts said. "And I also think that this is regressive. I think it hurts poor people in our state. I think it favors wealthy people in our state.”
The push to overhaul Kentucky's tax system comes at a time when the Bluegrass State has massive surpluses in revenue collections and huge amounts stashed in budget reserves.
Under the bill, the state’s 5% personal income tax rate would be lowered incrementally over a period of years until the levy is eliminated. The measure calls for the rate to drop to 4% next Jan. 1.
After that, future personal income tax rate cuts would hinge on the state meeting revenue targets. Those targets would serve as safeguards to ensure the state achieved the necessary revenue growth before triggering another rate cut, Petrie said.
Dropping the personal income tax rate to 4% is estimated to cost the state about $1 billion. The House accounted for such a loss in the two-year budget it passed weeks ago, setting aside about $1.1 billion in unappropriated funds. The Senate hasn't yet revealed its spending plans for the state.
The House-passed tax bill includes no reduction in the state corporate income tax.
It would significantly broaden the tax base by extending the sales tax or a user fee to a host of services. Those services would include taxi cabs and car rentals, residential and nonresidential security systems, bodyguard and self-protection services, process servers, valet and parking services, pleasure watercraft docking, entertainment venues and event space rentals, legislative and executive branch lobbying, cosmetic surgery procedures (non-medically necessary), personal financial planning, private mail services, road and travel services, executive employee recruitment services, unsolicited telemarketing services and public opinion research.
Under the bill, groceries and medication would remain exempt from the state sales tax.
Democratic Rep. Al Gentry predicted the plan would be a net-loss for lower-income Kentuckians. They'd pay as much or more in sales taxes than their savings from income tax cuts, he said.
“This is really a shift in the tax burden,” Gentry said.
Supporters predicted the tax changes would spur population growth in Kentucky and help overcome the shortage of workers that's been a hangover from the COVID-19 pandemic.
“If you want to have a workforce, you must have a tax code that benefits workers," said Republican Majority Floor Leader Steven Rudy.
Democrats disputed the population-growth claims, saying people are swayed more by such factors as the quality of education and health care when deciding where to live.
The bill also would implement a “battery reclamation fee” on electric and hybrid vehicles and a tax on the use of fee-for-service charging stations. It also includes a tax amnesty program, offering a chance for people who owe taxes to pay their bills without penalty.
The state Senate recently passed a bill that would deliver more than $1 billion in income tax rebates to taxpayers. The measure would grant state personal income tax rebates of up to $500 per individual and up to $1,000 per household. Supporters said it's intended to give some relief to Kentuckians struggling with rising inflation. The Senate vote sent the measure to the House.
Ultimately, any sweeping tax bill is likely to be worked out in a conference committee of House and Senate leaders. Lawmakers passed the two-thirds mark of their 60-day session this week.
Democratic Gov. Andy Beshear has endorsed a temporary cut in the state sales tax rate as a way to provide widespread relief from rising consumer prices. It would deliver $873 million in tax relief for Kentuckians struggling with rising prices, the governor has said.
The House-passed legislation is House Bill 8.