A coalition of 28 Kentucky organizations is urging lawmakers to reject additional cuts in the state income tax when the legislature convenes Jan. 3.
“Record surpluses used to justify the cut are largely a mirage,” says a letter sent Friday to members of the General Assembly and released by the Kentucky Center for Economic Policy.
Those signing the letter include the Kentucky Council of Churches; Kentucky Education Association; Kentuckians for the Commonwealth; Homeless and Housing Coalition of Kentucky, and other labor, health, education and community organizations.
A landmark law enacted by the legislature earlier this year will reduce the income tax rate from 5% to 4.5% effective Jan. 1.
The new law also laid out a process by which the General Assembly could consider future cuts of a half a percentage point so long as two conditions in the prior fiscal year signaled the state’s strong financial health. Both conditions were met at the end of last fiscal year, setting the stage for the legislature to consider cutting the rate again. If it does, the income tax rate would drop to 4% effective Jan. 1, 2024.
Republicans who hold a supermajority in the legislature say that lowering the income tax will make Kentucky more business friendly and spur economic growth and that the new law’s gradual approach will prevent a fiscal meltdown such as the one that followed tax cuts in Kansas.
In response to the letter, Senate budget committee chairman Chris McDaniel, R-Ryland Heights, issued this statement: “It’s hard to imagine an organization would advocate Kentuckians pay more in taxes while concurrently calling for an expansion of state government amid four-decade high inflation.
“The Kentucky General Assembly’s conservative supermajorities proudly stand with all Kentuckians and recognize consumers—our constituents and taxpayers—know best how to spend their money.”
The letter sent to lawmakers warns that the state’s robust revenue growth is temporary and fueled by federal spending that will not last.
“Kentucky, like other states, massively benefited from an injection of federal money during the pandemic. The CARES Act and American Rescue Plan pumped billions into Kentucky. The federal government provided stimulus checks, expanded unemployment benefits, forgivable business loans, and state and local relief, stimulating job growth and spending that temporarily enhanced state income, corporate and sales tax revenues,” lawmakers are warned in the letter.
“Inflation has also played a major role in boosting surpluses by increasing state sales and income tax receipts as prices and incomes rise. But inflation also increases the prices of state expenses, from hiring and retaining public employees to buying supplies and equipment.”
Earlier this week, an economic advisory panel, the Consensus Forecasting Group, predicted that state revenue will continue to grow, reaching an unusually large surplus of $1.4 billion when the state’s current fiscal year ends June 30.
The forecasting group predicted 3.4% growth in revenue to $15.2 billion in the current fiscal year and 1.7% growth in the following fiscal year.
The letter to lawmakers warns that “the strong revenue growth projected for this year turns to a 3% decline when adjusted for inflation” and also warns that the benefits of an income tax cut would flow largely to the wealthy.
“We urge you to reject the permanent reduction of Kentucky’s General Fund receipts on the back of these temporary monies,” says the letter “and direct resources toward Kentucky’s pressing needs, ranging from building homes for flood victims in Eastern Kentucky, paying educators and other public servants what they’re worth and allowing every child to access pre-K, to give just a few examples.”
