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Experts Say KY Should Hit Pause on Tax Cuts Amid Recession Fears

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Tuesday, October 11, 2022   

The amount of income tax Kentucky residents pay is slated to decrease slightly beginning next year, but experts say the Federal Reserve's decision to hike interest rates has set the stage for an impending recession, and they're concerned more tax cuts could drain the state budget and impact critical public services.

Jason Bailey, executive director of the Kentucky Center for Economic Policy, said the state uses tax funds to help communities rebuild from natural disasters. He argued given the level of devastation from the recent flooding in eastern Kentucky, the state must be able to help provide safe housing, water access and other basic needs for thousands of people as winter approaches.

"The damage in eastern Kentucky from the flooding was extensive," Bailey observed. "There are about 1,600 homes that were destroyed, bridges and schools that need to be replaced. And the federal government provides some resources but not nearly enough given the scale of the disaster there."

Earlier this year, the Republican-controlled state Legislature voted to override the governor's veto of House Bill 8, legislation outlining the gradual reduction of the state's current 5% individual income tax rate down to 4.5% next year, with potential future reductions down the road, based on the amount of money in Kentucky's general fund.

Bailey acknowledged Kentucky has padded its rainy-day fund with a $943 million surplus, but he cautioned permanent tax cuts going disproportionately to the wealthy will ultimately take money away from public schools, health care access and transportation, if a recession hits.

"These tax cuts will go overwhelmingly to the wealthy at a time when everyday Kentuckians need state services to help buffer what could be a painful recession," Bailey contended.

He pointed to child care as an example of how state dollars from taxes could be used to help prop up the child care industry statewide and help families already struggling with inflation and high gas prices.

"About half of Kentuckians live in a child care desert," Bailey pointed out. "We've seen child care centers shut down throughout the state. People can't afford it. And it's not sustainable."

American Rescue Plan Act funds for child care centers expire in 2024. According to a recent survey by the Prichard Committee, 72% of child care centers in the Commonwealth said they would increase tuition without the additional federal funding. About 22% said they would shut their doors.

Disclosure: The Kentucky Center for Economic Policy contributes to our fund for reporting on Budget Policy & Priorities, Criminal Justice, Education, and Hunger/Food/Nutrition. If you would like to help support news in the public interest, click here.


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