Shift in budget and tax philosophy, economic development vision credited with budget surplus
Frankfort, Kentucky (August 17, 2022) – The state fiscal year ended on June 30 and Kentucky’s revenue surplus will stand at more than $1 billion dollars. This surplus is the second highest in history and just shy of last year’s record $1.1 billion. The surplus leaves the state on solid terms to cut the state’s individual income tax to 4.5% in January of 2023 and to 4.0% in January of 2024. The tax cut passed during the 2022 Regular Session as part of the most recent phase in a move to modernize state tax structure to make it more competitive and create economic opportunity.
“The $1.0135 billion budget surplus is great news but comes as no surprise to those of us in the legislature. This is what happens when you commit to sound fiscal policies and responsible tax reforms in order to foster economic growth as we have over the past five years. While there are some, including the Governor, who seem committed to spending every available taxpayer dollar, the House will continue to pass budgets aimed at meeting today’s needs while planning for the future. This announcement is the result of these efforts to build a stronger Kentucky. In fact, despite the Governor’s best efforts to veto the tax modernization package, the next step will come in January 2023 when Kentuckians will keep more of their hard-earned money as they see the first drop in the incremental elimination of the personal income tax,” House Speaker David Osborne added.
HB 8 calls for a series of incremental cuts until the personal income tax is eliminated completely. Each cut is triggered by a formula based on how much actual revenues exceed expenses plus the dollar value of a 1% drop in income tax. If that trigger is engaged, lawmakers then act to engage decreases by half a percentage point. Based on state figures, legislative branch tax experts expect the January 2023 decrease is expected to leave an estimated $600 to $650 million in taxpayer pockets to be invested and spent in local communities.
The bill’s sponsor and co-chair of the Interim Joint Committee on Appropriations and Revenue, Representative Jason Petrie, added that lawmakers anticipated the budget surplus and used it to craft both HB 8 and the budget lawmakers passed earlier this year. According to Representative Brandon Reed, previous policies like these measures led to the budget surplus, while still allowing the state to meet and exceed its commitment to public pension funds and make record investments in public education.
Prior to HB 8’s focus on eliminating the personal income tax, lawmakers passed landmark employment and business friendly legislation within days of the 2017 Regular Session convening. Those measures positioned the state to take advantage of a surge in the national economy and unleashed the fiscal potential of the Commonwealth. Within months, the state began to experience record increases in job growth and economic investment.
In 2018, lawmakers took the first steps towards comprehensive tax reform with a focus on updating business taxes to better reflect the modern economy, broadening the base to more fairly levy taxes, and lowering tax rates for individuals. Essentially, the approach allowed more people to pay less. Kentucky was on track to shatter year over year revenue records by the end of 2019 and was prepared to expand the focus to growing a skilled workforce and investing in infrastructure improvements.
While the Covid-19 pandemic and the state’s response to it caused the economy to falter, the legislature ignored calls to spend billions in federal relief dollars on one time allocations with little to no return for taxpayers. Instead, lawmakers worked to take maximum advantage of every dollar to leverage the state’s economic comeback. As a result, investments are moving forward in water and wastewater projects throughout the state, an expansion of high speed internet services to unserved and underserved areas, and other projects with long term benefits.
Petrie added that the legislature also made major contributions to the state’s budget reserve trust fund, which today sits at the highest level ever and can be used to help with both challenges like tragic flooding in Eastern Kentucky and opportunities like economic development investments. Kentucky’s credit rating also benefits from the increase in the budget reserve, which translates into financial savings.
“We’ve been intentional in every step and the results of these efforts can be measured in this surplus. While we know there are some who would like to use these dollars on projects that benefit their special interests, we’ll continue to take our role as trustees of the people’s resources seriously,” Petrie said. “Earlier today we heard a state official tell a budget subcommittee that the cabinet they lead is ‘very good at spending money,’ which seems to represent the state’s budget philosophy until we adopted a conservative approach to state spending. These resources belong to the people of Kentucky and they expect and deserve better.”
###