Every week, another client sits down across from me with a letter in hand, a Kentucky Audit Confirmation Letter, crisp and official, often the first one they’ve ever received in decades of running a business. They want to know how serious it is. I have to tell them the truth: very.
This is what Kentucky’s celebrated income tax cuts actually look like from where I sit.
The rollback nobody questioned
Over the past decade, Kentucky has systematically dismantled its graduated income tax structure. Starting in 2015, rates fell from 6% down to 5%, then to 4.5%, then 4%, and as of January 1, to 3.5%. The endgame, if certain budget triggers are met, is zero, no state income tax at all.
Politicians have sold this as a gift to Kentucky taxpayers. My clients, most of them small business owners watching every dollar, loved the idea. Lower taxes on themselves. Higher taxes for the wealthy who can afford to buy more. Sounds like a fair trade.
The math, however, tells a completely different story.
Who actually wins
Consider three real scenarios:
• The wealthy professional. An investment advisor earning a million dollars annually paid $59,666 in Kentucky income tax under the 2017 graduated system. By 2023, under the flat 4.5% rate, that bill had dropped to $44,866. That’s $14,800 back in his pocket every single year, a meaningful windfall.
• The small business owner. A self-employed mechanic netting $65,000 a year paid $3,514 in 2017. By 2023, he was paying $2,836. His annual savings? $678. Less than two dollars a day.
• The low-income worker. A single mother working part-time at a daycare or fast-food restaurant? She received exactly zero benefit. Kentucky’s low-income and family-size tax credits already zeroed out her liability, just as they did before any of these cuts took effect.
The savings are real, but they scale dramatically upward. The wealthier you are, the more Kentucky’s tax reform has done for you.
The bait and switch
Here’s where it gets darker.
To offset the revenue loss, Kentucky quietly expanded the list of services subject to sales tax. That mechanic who pocketed $678? He’s now paying sales tax on event-space rentals, summer camps, youth sports leagues, tattoos, massage therapy, personal training, interior decorating, moving services, photography, website hosting, security monitoring, and various repair services, on top of everything he was already paying.
Run the numbers on even a handful of those services throughout the year, add in the general inflation in prices of taxable goods, and his $678 disappears entirely. He breaks even at best. More likely, he’s paying more in total taxes than he ever did before the “cuts.”
The wealthy taxpayer faces a different arithmetic entirely. To claw back the $14,800 he saved on income taxes, Kentucky would need him to spend an additional $246,666 on taxable goods and services. That simply isn’t happening. Wealthy families don’t suddenly buy more clothes and electronics when their income taxes drop. They invest in stocks, in real estate, in assets that generate exactly zero revenue for the state.
And for Kentucky’s lowest earners, the ones who gained nothing from the income tax changes but now face higher costs on everyday services? There’s no gentle way to put it: this is a net tax increase. Full stop.
The revenue gap and who fills it
Since 2018, Kentucky’s income tax cuts have carved out more than $2 billion in annual revenue. That money has to come from somewhere.
Enter the audit surge.
The Department of Revenue has dramatically ramped up enforcement, and small businesses are the primary target. Industries swept into the sales tax net for the first time such as landscaping, dog grooming, and personal training are priority targets. But the dragnet extends far beyond them. Over the past two years, I’ve handled more Kentucky sales tax audits than in any comparable period in my career. The calls come from material suppliers in rural counties, from businesses deep in Eastern Kentucky’s coal country, from Main Street shops that have operated for decades without ever hearing from an auditor.
Long-established businesses are receiving their first Audit Confirmation Letters, typically covering a four-year lookback period. And they are, bluntly, sitting ducks.
Large corporations maintain entire compliance departments to ensure proper sales tax collection. Auditing them can yield relatively little because they’ve already built the systems. But small business owners operating on thin margins, without dedicated accounting staff, without sophisticated internal controls? They’re easy pickings. For a business owner who saved a few hundred dollars in income taxes, one bad audit can mean tens or hundreds of thousands of dollars in sales tax liability, penalties, and interest.
The Department of Revenue is not the villain here. It can only work within the laws our legislators create. Roads must be built, services must be funded, and government does not run on goodwill alone. And yet, many small business owners continue to direct their frustration at the government itself. The millionaires quietly pocketing the gains and the legislators who enable them rarely draw the same ire.
The trap that never closes
The most devastating consequence of Kentucky’s expanding sales tax is one that most business owners don’t understand until it’s already too late: trust fund tax liability.
When a business collects sales tax on behalf of the state, that money legally belongs to the government the moment it’s collected. It’s held “in trust.” If the business fails to remit it — whether through a bookkeeping error, a cash flow crisis, or simple mismanagement, the owner becomes personally liable. Not the LLC. Not the corporation. The person.
And here’s what makes this genuinely catastrophic:
• Personal liability survives business failure. Close the business, and the debt doesn’t close with it.
• Bankruptcy doesn’t help. Unlike credit card debt or even personal income taxes, sales tax obligations cannot be discharged in bankruptcy. Ever.
• The clock doesn’t run out. Kentucky’s official statute of limitations for active collection is ten years, but the underlying assessments never expire. After a decade, the Department of Revenue can still intercept state and federal tax refunds indefinitely and demand payment of back taxes as a condition of any future installment agreement. The state can take away your driver’s license, refuse to issue your vehicle tags, and take away any professional license you might hold.
• A divorce, a medical emergency, an economic downturn, any of these can destroy a small business overnight. When it happens and the owner can’t pay all their obligations, the sales tax debt doesn’t just linger. It follows them for the rest of their lives, surfacing at the worst possible moments, strangling any chance of financial recovery.
The real bill
Kentucky’s income tax cuts make excellent campaign material. In press releases and stump speeches, they sound like a gift to working families.
The reality is something else entirely: a wealth transfer that delivers substantial, compounding benefits to high earners; break-even or negative outcomes for the middle class; and outright tax increases for the poor. The revenue shortfall is patched by unleashing auditors on the small businesses least equipped to defend themselves, businesses whose owners now carry personal trust fund liability that can define their financial futures for decades.
Before you celebrate Kentucky’s march toward a “zero income tax” future, it’s worth asking a simple question: Who’s actually paying the bill?
I see the answer every week, sitting across the desk from me, holding a letter they don’t know how to read.
Jennifer Gatherwright is an attorney with Gatherwright Freeman & Associates who has twenty years experience with small and middle-market companies to help clients achieve their business goals. Through her tax practice, she has represented clients in all 50 states and has achieved national recognition for her experience in the field of tax controversy. She is a graduate of Chase College of Law and of the University of Cincinnati with a masters in tax accounting. She and her family live in Northern Kentucky.