The next time the Kentucky state legislature meets, barring a special session, will be early next year when it takes on its most important job: passing a budget. The state budget is the most powerful tool the commonwealth has to build a Kentucky where everyone can thrive.
In even-numbered years like 2024, lawmakers allocate available funds to schools, health care and other vital services all Kentuckians rely on. Sessions in odd-numbered years like the one just completed are supposed to be “non-budget.” But the 2023 session ended up being the most consequential in memory when it comes to state finances. That’s because of House Bill 1, another step in a radical effort to eliminate the source of nearly half of state revenues.
HB 1 follows actions taken in 2018 and 2022 to reduce the income tax, which generates the resources for 41% of the state General Fund. Whereas Kentucky had a 6% top income tax rate every year from 1936 to 2018, the rate will be 4% starting in 2025. The cuts will cost $1.3 billion a year, or more than the state spends to support all of its universities and community colleges.
That revenue reduction will come at the benefit of very few. Kentucky workers will only see a tiny change in their paychecks, while those making more than $105,000 annually will receive two-thirds of the cut. A full 20% of the tax cut will go to the top 1% of earners, who make more than $514,000 a year.
The revenue sacrificed to these cuts could help further address pressing demands like Kentucky’s teacher and state worker shortage, the thousands in housing crisis due to the eastern Kentucky floods and the funding cliff facing child care centers when federal pandemic money soon dries up.
Instead, lawmakers held down spending this session in an apparent effort to make possible another cut to the income tax rate next year, this time to 3.5%. There was one pressing budgetary need the legislature addressed, appropriating funds to the crisis-ridden juvenile detention system. But they were tight-fisted beyond that, even holding back some funds already appropriated for public employee raises and state parks renovation. In total, the legislature maintained a fairly austere budget despite the ample availability of surplus dollars and Kentucky’s many needs.
A major problem with the aggressive tax cuts continued under HB 1 is that they treat recent strong revenues as permanent rather than what they are: the temporary result of unique pandemic conditions. Federal stimulus has pushed the unemployment rate to its lowest in 40 years, and supply chain problems have pushed inflation to its highest rate over that time. Those factors have artificially elevated prices and wages, but are not expected to last. With the Federal Reserve aggressively raising interest rates, there is rising uncertainty about where the economy is headed and persistent concerns about a recession.
HB 1 also put into law for the first time the explicit goal of eliminating the income tax entirely, a calamitous move that would wipe out more than $5 billion in revenue from the state.
How will we replace that? Supporters have put forward no plan for doing so, or even identified a feasible option. Fairy tales of resulting mass migration and economic growth are disproven through the experience of states like Kansas.
Lawmakers are unlikely to try making up some of the enormous future lost revenue by increasing the sales tax. That would be asking working class, poor and elderly Kentuckians to pay for tax cuts for the wealthy, and would also go against the extreme anti-tax ideology too many lawmakers hold. We are then only left with shrinking revenues – and with it, the crucial public investments Kentucky needs to be educated, healthy and prosperous.
Let’s stop now before more damage is done.