We continue our examination of executive power and tax changes in Part Three of this series (see Part One and Part Two for a refresher). Kentucky levies an income tax on all income earned by Kentucky residents, as well as all income earned by nonresidents through Kentucky sources. The personal income tax rate is currently five percent of net taxable income.
Earlier this year, the state legislature passed House Bill 8 (HB 8), despite Governor Beshear’s veto. Under HB 8, any rate reduction must be “triggered” by certain income levels. Each rate reduction will be 0.5%. The reduction depends on the amount of State Fiscal Reserve Trust Fund funds, as well as the amount of general fund revenue that exceeds appropriations in a fiscal year. Another safeguard put in place is that rate reductions will not occur automatically once revenue triggers are met; on the contrary, any reduction will have to be considered and approved by the General Assembly. If all goes as planned by the legislator and the economy cooperates, the use of these triggers will likely lead to the phasing out of personal income tax in its entirety over time. The legislator has clearly indicated its intention to reduce the rate of income tax, but to do so in a responsible manner.
As noted above, HB 8 provides various safeguards to avoid the same mistakes that occurred with other states, such as Kansas years ago, which unsuccessfully attempted similar tax elimination initiatives. income with no safeguards in place. Another guarantee put in place is the approval of the Ministry of Revenue. In accordance with HB 8, even before the reduction in the rate is brought before the General Assembly, the legislature gives the executive branch, through the Department and the Office of the Director of the State Budget, the power to approve or do not approve the reduction. HB 8 provides that effective September 1, 2022, the Department, with the assistance of the Office of the State Budget Director, “will review the conditions for reduction…and determine whether the conditions for reduction have been met,” and whether they are met, the Department will report to the Appropriations and Revenue Committee of the General Assembly.
Given the recent expansion of the executive branch’s legislative-like power, both through executive orders and emergency administrative regulations discussed in our previous article, could the Governor order the Department of Revenue to reject the rate reduction and ensure that the reduction is not passed on to General Assembly even if the applicable financial and revenue measures are met?
Although HB 8 allows the executive branch to review the tax situation to determine if the conditions have been met, given our previous discussions of the executive branch in parts one and two, this legislation does not expand the powers of the governor. to control Kentucky’s taxation.
If the Governor chooses to do so, as in the case where the Department and the Budget Office do not recommend or approve a rate reduction when the fiscal parameters are met, it would essentially deprive the General Assembly of its power to taxation, in that it would nullify the decision of the General Assembly to phase out the personal income tax in Kentucky. As our previous blog post indicates, the Legislature is best placed to set policy and create law in the Commonwealth. Circumventing the legislative process to pass sweeping tax policy changes not only violates the separation of powers as set forth in Section 28 of the Kentucky Constitution, but also puts the Commonwealth at risk of suffering irreparable financial harm.
It was reported that at the end of Kentucky’s fiscal year, June 30, 2021, the state closed the year with its second-highest surplus in its history of $1.1 billion. This revenue surplus had to meet the requirements set out in HB 8 to trigger the first 0.5% rate cut in 2023. It was reported that for the first 0.5% rate cut, the Department reviewed and decided that the reduction conditions were met. in fiscal year 2020-21, which was expected based on the state’s fiscal situation this spring when HB 8 was drafted and passed. However, since the executive branch, through the Department and the Office of the Budget Manager, must approve every rate cut in future years, and given the 2023 Kentucky Governor election, the above discussions regarding executive power and its effect on Kentucky’s taxes could become extremely poignant in years to come.