Understanding state and local taxes in Kentucky can be confusing for those who have never had to deal with them before. Distilling the complex codes, jurisdictions, and requirements is complex. This guide will provide a 101 overview of each of Kentucky’s taxes and explain how they work.

There are four types of state and local taxes in Kentucky: income tax, occupational tax, city tax, and county tax. Aside from the standard income and sales taxes, there are also a number of other taxes, such as transient room tax, gas tax, and alcohol tax, that vary by jurisdiction. Of these, the income tax is the most important source of revenue for the state government – making up the largest share of the state’s tax revenue – while the occupational tax is the most important source of revenue for local governments.

The tax rates for these taxes vary depending on the city or county in which you live, as well as your occupation. However, all taxpayers in Kentucky are required to pay these taxes.

What are state and local taxes?

The state of Kentucky imposes a number of taxes, including income tax, sales tax, and property tax. Kentucky’s income tax is imposed on all residents who earn income from wages, salaries, tips, interest, dividends, and other sources. Kentucky’s sales tax is imposed on the sale of all goods and services within the state, and that revenue goes into the state’s General Fund. The tax rate is 6%, with some exceptions for certain items, such as food and medicine. The state has a flat income tax rate of 4%, which is lower than the national average of 7.3%. This rate will continue to lower as state sales tax receipts permit with the General Assembly’s passing of House Bill 8 during the 2022 regular legislative session. The average local income tax (occupational license fee) rate levied by city and county governments in Kentucky is 1.8%, going all the way up to 2.5%.

Kentucky’s property tax is imposed on all real and personal property located within the state. The tax rate varies depending on the county in which the property is located. Property taxes in Kentucky are levied by both the state and local governments. The state’s average effective property tax rate is 1.24%, and the average effective property tax rate for local governments is 1.41%. Kentucky’s property tax rates and increases are statutorily capped, limiting the increase in the amount of property taxes collected by taxing districts every year.

What is the difference between state and local taxes?

There are many different types of taxes, and they vary depending on the state and locality. In Kentucky, there are state taxes, local taxes, and federal taxes, and the state government collects both state and local taxes. The state government uses the state tax revenue to fund state programs and services, while the local government uses the local tax revenue to fund local programs and services. The types of taxes imposed by each level of government vary, but they all have one thing in common: they are all compulsory. This means that everyone who lives in Kentucky must pay taxes.

The main difference between state and local taxes is who is able to collect the tax revenue and how that tax revenue is used. For example, local governments generate revenue that they are required to send to the state government for redistribution. Kentucky is also one of only 12 states nationwide that does not allow local governments to leverage diverse tax options, such as a local sales tax.

How are taxes used?

The state of Kentucky uses taxes to fund a variety of programs and services at the state and local level. These include education, infrastructure, public safety, and health care.

The primary purpose of taxes is to fund public services, including education, infrastructure, and public safety. State and local taxes also help to fund specific programs and services that benefit residents, such as transportation and environmental protection.

Since local governments in Kentucky are restricted from most revenue-generating taxes, they frequently defer to the state to determine certain investments, like incentive projects, site development, and road infrastructure.

Conclusion

In conclusion, it is important for Kentucky taxpayers to understand how their state and local taxes are used. The majority of tax revenue is used to fund education, public safety, and infrastructure.

When local governments are restricted from flexibly generating revenue and choosing which tax options work best for their communities, it can increase the burden on the state (and taxpayers) while also preventing local investment in things like parks, sports centers, and innovative projects. Understanding Kentucky’s complex tax codes empowers residents and leaders and can lead to transformation toward a better system.