A brand-new version of HB 372 was released the night before the last day of the session. While research shows the best way to attract people to move to or stay in Kentucky is to invest in excellent schools, infrastructure and other aspects of a good quality of life, the bill’s proponents say it will encourage “remote workers” to move to or stay in Kentucky through up to $15,000 in income tax breaks plus a potential property tax break. In actuality, HB 372 takes resources from investments in Kentucky communities to create an expensive tax windfall that will primarily benefit high-income individuals who can use loopholes in the hastily crafted language to lower their tax liability without any benefit to Kentucky.
HB 372 is easily gamed.
Kentucky companies could easily game this tax break by setting up a separate corporate entity across the state border and allowing new employees to the state a tax break simply by working at home. Another group that could game the program are people who work across the Kentucky border who could get up to $15,000 simply by moving a few miles to the Kentucky side while continuing their previous work for an out of state company (including from one apartment to another, such as from Cincinnati to northern Kentucky). Neither of these examples provides a benefit to the commonwealth, but will cost substantial tax dollars.
HB 372 is a tax giveaway for wealthy people.
Because it is structured as a non-refundable income tax credit that cannot be carried forward or back, the bill’s maximum tax breaks are available only for people who make more than $100,000 a year. The property tax credit in the bill, which is on top of the other credit, will be biggest for those who buy the most expensive homes. Low-wage workers below the poverty line don’t currently pay income taxes and so wouldn’t benefit at all (even while paying the highest share of their income in sales taxes of any other group of Kentuckians). Also ineligible are essential workers because their jobs require in-person activities, who are more likely to be women and people of color. By cutting taxes even further for higher-income people, this tax break would make our current regressive tax system even more upside down.
HB 372 unfairly favors out-of-state people over Kentuckians.
This tax break favors out-of-state people and businesses, when the resources it would drain from the General Fund could be used to invest in Kentuckians’ education, health and more through the state budget. Out-of-state companies would have an unfair advantage in competing to hire new residents compared to Kentucky companies because the former could offer a tax break.
HB 372 is based on a flawed theory that tax breaks will draw people.
This legislation wrongly assumes that simply providing people with tax breaks will cause them to move to the state. Decades of research shows that state tax levels have little to no effect on whether and where people move. Those decisions are much more likely to be due to specific employment opportunities, housing costs, family proximity, quality of life considerations and weather. Providing expensive tax breaks like HB 372 can actually worsen a state’s attractiveness by reducing the resources for public investments that improve quality of life.
HB 372 will provide a windfall for what people are doing anyway.
Some people move between states every year anyway. According to IRS data, 44,226 people moved to Kentucky in 2017-2018, and those people had a total adjusted gross income of $2.3 billion. If just a small fraction of that new existing stream of migrants every year work from home, the tax break will be very expensive even as it subsidizes people for what they would be doing anyway. Also eligible are all students who attended a Kentucky college or university, whether they graduated or not, and former members of the armed forces — adding an even larger swath of people who largely would be rewarded for what they were going to do anyway.
HB 372 could force Kentucky to pay back federal aid.
This bill is a tax break that may be seen as an unallowable, indirect use of American Rescue Plan funds that would force us to repay an equal amount of federal aid. Kentucky’s budget would be hit twice — first with the loss of state tax dollars and second with the loss of desperately–needed federal aid.