Kentucky enacts personal income tax rate reduction
TAX ALERT | February 24, 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.
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.
Let's Talk!Call us at (800) 880-7800 or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by David Brunori, Mo Bell-Jacobs and originally appeared on 2023-02-24.
2022 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Harding, Shymanski & Company, P.S.C. is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Harding, Shymanski & Company, P.S.C. can assist you, please call (800) 880-7800.