The state of Kentucky has recently announced that it will raise the income tax rate for its residents in 2024, reversing the previous plan to phase out the tax by 2025. This decision has sparked mixed reactions from the public, as some see it as a necessary measure to fund essential services, while others view it as a burden on the economy and the taxpayers.
In 2022, the Kentucky legislature passed a bill that aimed to gradually eliminate the individual income tax and shift the tax burden from income to consumption. The bill set a series of fiscal triggers that would reduce the income tax rate by 0.5% each year, starting from 5% in 2022, until it reached zero in 2025. The triggers were based on the balance of the Budget Reserve Trust Fund and the ratio of General Fund revenues to appropriations and the cost of the tax cut.
The triggers were met for 2023 and 2024, resulting in the income tax rate dropping to 4.5% in 2023 and 4% in 2024. However, in September 2023, the state budget director reported that the trigger for 2025 was not met, as the General Fund revenues fell short of the required amount to cover the tax cut. Therefore, the income tax rate will remain at 4% in 2025, unless the legislature changes the law.
Reasons for the Tax Increase
The state government has cited several reasons for raising the income tax rate in 2024, instead of following the original plan to lower it. The main reason is the impact of the COVID-19 pandemic, which caused a significant decline in the state’s economic activity and tax revenues in 2023. The state faced a budget shortfall of $1.1 billion in the fiscal year 2023-2024, and had to use federal relief funds and the Budget Reserve Trust Fund to balance the budget.
Another reason is the need to invest in public education, health care, infrastructure, and other vital services that have been underfunded for years. The state ranks low in many indicators of social and economic well-being, such as poverty, health, education, and income. The state government argues that raising the income tax rate will generate more revenue to address these issues and improve the quality of life for Kentuckians.
Reactions to the Tax Increase
The announcement of the tax increase has been met with different reactions from various stakeholders. Some groups, such as teachers, health care workers, and social service providers, have welcomed the decision, as they hope to see more funding and support for their sectors. They also claim that the income tax is more progressive and fair than the sales tax, as it is based on the ability to pay.
However, some groups, such as business owners, taxpayers, and conservative lawmakers, have opposed the decision, as they believe that the income tax is harmful to the economy and the taxpayers. They argue that the income tax discourages work, saving, and investment, and drives people and businesses out of the state. They also contend that the sales tax is more efficient and neutral, as it does not distort economic choices.
The state of Kentucky has decided to raise the income tax rate for its residents in 2024, reversing the previous plan to phase out the tax by 2025. This decision is based on the state’s fiscal situation and the need to fund essential services. However, it has also generated controversy and debate among the public, as some support the tax increase, while others oppose it. The future of the income tax in Kentucky will depend on the outcome of the 2024 elections and the performance of the economy.