Kentucky Adopts New, Fairer Flax Income Tax Rate To Increase Competitiveness

The Kentucky state legislature overrode a gubernatorial veto this week and will have a flat tax rate for all levels of incomes moving forward. This is excellent news for those who live in the state, as higher levels of earnings will no longer be penalized with higher tax rates.

Economist Dan Mitchell shares his thoughts on the new tax law on his blog. The down side here is that the new law is a net tax increase. However, with a flat rate it is much harder to subsequently increase taxes on everyone.

With this change in tax law, Kentucky moves from 33rd on the Tax Foundation's ratings scale to 18th.

"…legislators in Kentucky overrode Governor Matt Bevin’s veto to pass HB 366, a tax reform package, in the last few days of the session. Ultimately, HB 366…increases Kentucky’s ranking on the State Business Tax Climate Index from 33rd to 18th. …Here’s how HB 366 changes Kentucky’s tax code: Replacing the current six-bracket individual income tax, which has a top rate of 6.0 percent, with a 5 percent single rate individual income tax; …Replacing the current three-bracket corporate income tax, with its top rate of 6.0 percent, with a 5 percent flat rate; …Expanding the sales tax base to include select services…; and Raising the cigarette tax from 60 cents to $1.10 per pack. …the changes in this tax reform package dramatically improve the state’s tax climate. By broadening bases while lowering rates, starting to correct the inequities in the sales tax base, and taking steps to make the state more friendly to investment, policymakers in the state took a responsible approach to comprehensive tax reform."

An increase in taxes? A small one, yes. But the longer term effects my be better since playing political games with the tax rate will be more difficult moving forward. So, good for Kentucky. It's not optimal, but it's a step in the right direction.