I think that by now most Kentuckians know that the super majorities of the Kentucky House and senate are pushing hard to do away with the state income tax. They propose to replace it with increases in the state sales tax to unspecified goods and services currently not subject to state sales tax. And although they won’t come out and say it, most of them also think that an increase in the state sales tax rate will also be necessary. Let’s think for a minute about what that means for Kentucky retirees.

For many years Kentucky was known as a tax-friendly state for retirees. Each retiree had a $41,110 exemption to offset against pension or IRA income. And social security income normally wasn’t taxed at all. Because of these large exemptions many retirees paid no state income tax. 

I will use myself as an example. My wife and I moved to Kentucky at the very end of 2006. In 2007 I worked full time and my wife did some part time consulting work. We were gainfully employed and our tax payments for 2007 reflected that as we paid approximately $6,000 in state income tax. We retired effective 01/01/2008 and for the next 12 years our Kentucky State income tax obligation was zero! But in 2019, Republican Governor Matt Bevin got that $41,110 exemption lowered to $31,110. Consequently beginning in 2020, we paid a few hundred dollars in state income tax.

But consider what Republicans are proposing to do. The expenditures of the state government have to be paid for. Even the Republicans admit that because, unlike the federal government, states cannot run a budget deficit. If the Kentucky State Income Tax goes to zero, as is their plan, other taxes will have to be raised to make up the difference. And these taxes, unlike the state income tax, will be taxes that retirees will have to pay. 

In economics there is a concept called “propensity to consume.” The propensity to consume is the percentage that a household spends on goods and services. For retirees, the propensity to consume is very close to 100 percent. That means that when the state income tax is zeroed out, the $31,110 pension income exemption will become worthless. And since retirees spend most of their income, a very large percentage of those expenditures will be subject to the state sales tax.

Essentially the responsibility for financing state government will shift from high-income earners and corporations to lower to middle income earners. So Kentucky will go from being a state attractive to retirees to one where practically every dollar they spend is taxed. 

Since there are approximately 750,000 retirees in Kentucky they might want to contact their state legislators and ask why they are about to go from paying next to no state income tax to a sales tax hell where practically every dollar they spend is subject to a 6 percent (or higher) state sales tax.

— Jim Porter, Danville