ERLANGER, Ky. — Starting next year, Kentucky residents will be taking home more money. Gov. Andy Beshear signed House Bill 1 into law, lowering the individual income tax rate.
"Inflation has been an issue, rising costs have been an issue, but you overcome," said Jessica Fette.
Like so many people, Fette has been working around the challenges of the economy. She is not only the mayor of Erlanger but also the owner of The Hive, a coffee shop that serves breakfast and lunch. Fette opened the place in April 2022 and told WCPO 9 News she grew up in the restaurant business.
"I think if you start paying attention to the individual and understand what they need to be successful and keeping more of their hard-earned dollars that's what they need, they need that to be successful they know how to spend their dollars better than anybody," Fette said.
House Bill 1 will lower the personal income tax rate from 4% to 3.5% and goes into effect in January 2026. The Northern Kentucky Chamber of Commerce estimates someone making $80,000 a year will go from paying the state $3,200 in income taxes to $2,800 next year.
WATCH: Fette discusses the latest Kentucky law
We asked Fette how this would impact her and her business.
"Happier employees that get to keep more of their hard-earned dollars, that impacts the quality of the work experience and the quality of the product we put out," Fette said.
But NKU Haile College of Business economist Janet Harrah is warning this tax cut doesn't guarantee economic growth. She also cautioned about the potential of the tax base getting cut too much that it results in unintended consequences.
"They have to make up that revenue somewhere so other taxes will be raised to compensate or you have to cut services," Harrah said.
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Beshear noted Thursday that an analysis estimated that the half-percentage point cut would reduce the state's general fund revenues by $718 million annually once it is fully implemented. The general fund pays for most state services, including education, health care and public safety.
Democratic lawmakers were divided on the bill, with critics of the cut saying the lost revenue would jeopardize essential services in times of an economic downturn.
Beshear sounded confident the state can absorb the revenue loss.
“I believe that with the growth we’re seeing in certain areas of revenue, that we’re going to be able to manage that,” he said.
The governor pointed to the influx of private-sector investment and jobs added in Kentucky in recent years. Republican lawmakers say those successes resulted from business-friendly policies they passed.
General fund tax receipts in December were up 4.5% from the same period a year ago, the state budget director's office reported last month. Receipts increased 1.7% for the first six months of the fiscal year that ended June 30.
The push for tax cuts in Kentucky comes as President Donald Trump has proposed tax cuts for individuals and businesses, while governors and lawmakers in some states are seeking to cut more. The movement for more tax cuts comes after most states already have slashed income, sales or property taxes in recent years, and it’s pressing ahead even though state revenue growth has been slowing or stagnating.
For Fette, the tax cut translates to more repeat customers who will be more inclined to spend more of the money they now get to keep.
"The only other thing that would be really awesome is if Washington D.C. would pass the legislation to remove the taxation on tips," said Fette.
