Understanding the Impact of Kentucky’s New Tax Law

Published on April 29, 2022 by Andy Bertke in Consulting, State Local Tax, Tax Services

Last week, we unpacked Kentucky’s new tax laws in this great post by Cheryl Ganim. The measure was ratified by the Kentucky General Assembly in an override of Governor Andy Beshear’s veto this month. Now it’s time to take a look from a different angle, including the thinking behind the law and the expected timeline for implementation.

Research shows Kentucky has long struggled with growth on both the economic and population fronts and has fallen behind many other states. The new law is intended to provide tax modernization – including the gradual complete elimination of Kentucky’s income tax.

Insights on impact

I talked with Kentucky Representative Kimberly Moser about how the new law is expected to help; she said, “Kentucky’s economic development and personal budgets depend on a competitive tax structure. I am proud of the steps that the KY General Assembly is taking to reduce income taxes to ensure that taxpayers keep more of their hard-earned income.”

Beginning in 2023, the personal income tax rate will decline from 5% to 4%, with subsequent year decreases of between 0.5% and 1%, with the caveat that the state would have to meet specific revenue thresholds: for the income tax rate to decrease by one-half percent, the general fund would need to see a $1 billion increase in revenue.

The cost of change

Of course, the reduction in revenue from the personal income tax decrease will have to be offset, and as noted in our earlier post, that’s expected to come from an increased sales tax base. A 6% tax on services that previously enjoyed some exemptions, include marketing and telemarketing services, website design, development, and hosting, and non-essential cosmetic surgery (for the full list, see our previous post) is expected to be implemented. Drivers of electric vehicles as well as Uber and Lyft ridesharing services will also see new taxes.

Opponents have expressed concern that this will make it more difficult to expand small business in the state, and that some small businesses may relocate outside of Kentucky.