Kentucky is moving to lower its income tax rate. What is the rate in other states?
Kentucky's individual income tax rate dropped at the beginning of this year and may drop even further next year if the Republican supermajority of the Kentucky General Assembly passes its top-priority bill into law during the 2023 legislative session.
The tax cuts are the result of House Bill 8 passed in the 2022 session, which set up a triggering mechanism for the individual income tax rate to drop by half a percentage point each year if certain conditions are met — until it is eventually eliminated.
The individual income tax rate automatically dropped from 5% to 4.5% at the beginning of this year due to the budget conditions being met, while House Bill 1 — the top priority of Republicans in the 2023 session — would decrease it further to 4% on Jan. 1, 2024.
Under last year's bill, the corporate tax rate remains at 5% and the sales tax remains at 6%, though the legislation eliminated an exemption for dozens of services being subject to the state sales tax.
More:GOP's top priority, a bill to cut income tax rate to 4%, passes through Kentucky House
The tax cuts are part of Republicans' long-term goal of moving to a system that relies on taxing consumption instead of production, or sales taxes instead of income taxes, believing that better fosters an environment for economic growth.
Republican supporters of these tax changes cite Tennessee as a model to emulate, which has long been without an income tax and has a broader sales tax with a higher rate of 7% — a tax system they credit for the state outpacing Kentucky in economic and population growth in the past two decades.
Critics of the Kentucky GOP tax cut efforts — including Democratic legislators and the left-leaning think tank Kentucky Center for Economic Policy — argue they are regressive measures that mostly help the wealthy and disproportionately burden low-income Kentuckians. They also argue the income tax cuts are permanent, whereas the recent boost in revenue and surpluses is mostly driven by temporary federal stimulus packages of the pandemic era, setting up a situation where sales taxes may need to be increased if state government does not have enough revenue to meet its obligations.
Here is a look at the income tax structure in other surrounding states.
Tennessee's income tax rate
Tennessee has long been one of the few states without an individual income tax, though their numbers have now grown to nine states.
Tennessee has a 7% state sales tax, though local governments can also levy a sales tax of up to 2.75%. The state also has a higher corporate income tax rate of 6.5%.
Indiana's income tax rate
Indiana's current individual income tax rate will decrease from 3.23% to 3.15% this year, thanks to a law passed in 2022 that will incrementally lower the rate to 2.9% over seven years — so long as state revenue growth reaches at least 2%.
Republican legislators are sponsoring a bill this year that would create a new commission to look for ways to completely eliminate Indiana's individual income tax.
Indiana has a 4.9% corporate income tax and a 7% sales tax.
More:The Kentucky General Assembly's 2023 session kicks off Jan. 3. What to expect
Ohio's income tax rate
Ohio has a progressive individual income tax rate, ranging from 2.7% to 3.99%.
Ohio has no corporate income tax but does levy a tax on gross receipts. The state's sales tax rate is 5.75%, while local governments can levy a sales tax of up to 2.25%.
Illinois' income tax rate
Illinois has a flat individual income tax rate of 4.95% and a corporate income tax rate of 9.5%.
The state's sales tax rate is 6.25%, with local governments able to levy a maximum sales tax of 4.75%.
West Virginia's income tax rate
West Virginia has a progressive individual income tax rate, ranging from 2% to 5.75%, and a corporate income tax rate of 6%.
The state has a sales tax rate of 6% and local governments can levy an additional tax rate of up to 1%.
Virginia's income tax rate
Virginia has a progressive individual income tax rate, ranging from 3% to 6.5%, and a corporate income tax rate of 6.5%.
The state has a sales tax rate of 5.3% and local governments can levy an additional tax rate of up to .7%.
Missouri's income tax rate
Missouri has a progressive individual income tax rate, ranging from 1.5% to 4.95%, and a corporate income tax rate of 4%.
The state has a sales tax rate of 4.2% and local governments can levy an additional tax rate of up to 5.7%.
Reach reporter Joe Sonka at jsonka@courierjournal.com and follow him on Twitter at @joesonka.
This article originally appeared on Louisville Courier Journal: Kentucky cut its income tax rate. What is the rate in other states?
