Kentucky enacts personal income tax rate reduction

TAX ALERT | February 23, 2023

Authored by RSM US LLP

Executive summary: Kentucky cuts personal income tax rate by 0.5%

On Feb. 17, 2023, Gov. Andy Beshear signed House Bill 1, providing a 0.5% individual income tax reduction effective Jan. 1, 2024. Kentucky is one of the first states in 2023 to provide an income tax rate reduction, although likely not to be the last. 

Kentucky personal income tax reduction

Recall that last year, the Kentucky legislature overrode Gov. Beshear’s veto of an extensive tax bill offering a schedule for personal income tax rate reductions as well as expansion of the sales tax base. Once certain revenue conditions were met, the state was required to reduce the personal income tax rate by 0.5%. Those conditions were evaluated in September 2022 and with revenues exceeding the determination threshold, the state’s prior 5% rate was reduced 0.5% to 4.5% effective Jan. 1, 2023. Last year’s bill also provided for ongoing annual revenue evaluations but required action by the state legislature to implement any additional reductions. House Bill 1 provides the necessary action to further reduce the rate by 0.5% to 4% for tax years beginning on or after Jan. 1, 2024. 

Kentucky is one of the first states to cut an individual or corporate income tax this year after several years of tax cuts, although several states are proposing to do so as discussed below. Other tax legislation proposed in Kentucky includes a pass-through entity tax election. For more information on last year’s tax bill, please read our alert, Kentucky targets personal income tax cuts; expands sales tax base.

Finally, Kentucky is one of about ten states with divided government. Gov. Beshear is a Democrat with both chambers of the legislature held by Republican supermajorities, making the potential for any veto overrides plausible, as was the case with last year’s tax bill. Kentucky is also one of three states holding governorship elections in 2023, with Gov. Beshear and Republican Gov. Tate Reeves of Mississippi running for re-election, and Louisiana Gov. John Bel Edwards term limited. 

Takeaways

The Kentucky personal income tax reductions are a continuation of a two-to-three-year trend across the country. Since 2020, about two dozen states have reduced personal and/or corporate income tax rates as well as providing reductions or relief from many other state taxes. Such reductions obviously affect in-state residents but can also have a significant impact on out-of-state residents and businesses. 

Not all the proposals to reduce income taxes currently considered in the legislatures will be enacted, but many states are projected to continue healthy fiscal conditions into FY24. It is anticipated tax cut activity will continue, albeit on a smaller scale. The outcomes may affect business location decisions, pass-through entity liabilities, remote work considerations and general state tax planning.

Other tax cut proposals 

Several other states are considering additional personal and corporate income tax reductions as the 2023 state legislative session calendar approaches or passes the halfway point for many states. A non-exhaustive list of proposals is highlighted below:

• A proposal in Kansas would adopt a flat 5% rate for both personal and corporate income taxes (H.B. 2061)
• In Illinois, a bill has been introduced that would lower the personal income tax from 4.95% to 4.85%. (H.B. 3686), and bills have been introduced to reduce the corporate income tax rate from 7% to 6% or lower (H.B. 2599 and H.B. 2978)
• A study bill in Iowa would lower personal income tax rates and make it easier to lower corporate tax rates (S.S.B. 1126)
• In Louisiana, a bill was pre-filed to eliminate the franchise tax by 2025 (S.B. 1) 
• A bill in Minnesota would reduce personal income rates across the board (H.F. 977) and another bill would phase-in a 1% reduction of the corporate income tax rate for taxable years after Dec. 31, 2024 (H.F. 1561)
• A Missouri proposal would phase-out the corporate income tax by 2027 (H.B. 660), while another proposal would halve the corporate income tax by 2027 (S.B. 93)
• A Montana proposal is working its way through the legislature that would reduce the top personal income tax rate from 6.5% to 5.7% (S.B. 121)
• In Nebraska, the new governor is proposing significant personal and corporate income tax reductions 
• In Wisconsin, lawmakers in the Republican-controlled legislature are pushing for a flat tax of 3.25%, while the governor is proposing an alternative tax relief program

Taxpayers with questions about the Kentucky rate reduction, or who have questions on the state fiscal status and legislative direction for 2023 should reach out to their state and local tax advisers.