Kentucky on track to see third decrease in state income tax in 2026

Members of the Interim Joint Committee on Appropriations and Revenue received formal notification that the conditions required to lower the state’s personal income tax to 3.5% in January of 2026 have been met.

In 2022, lawmakers passed HB 8, a historic tax modernization package that included provisions to eliminate the state’s individual income tax gradually over time. That measure required that certain conditions be met before the tax could be decreased in increments of half a percent. The first condition requires our Budget Reserve Trust Fund to have enough money in it to equal 10% or more of General Fund revenues from the previous year.

“Today’s report from the state budget director confirms what we have been saying for over a decade: Conservative budgeting is best for Kentuckians. Over the past decade, we have grown the state’s reserve from $0 to over $5 billion,” said Senate Appropriations and Revenue Chair Chris McDaniel, R-Ryland Heights. “At the same time, we have stabilized and made solvent the worst-funded pension systems in the nation, made historic investments in education, and reduced the income tax from 6 percent to 4 percent. Today, we received word that we can take legislative action this January to reduce the state income tax from 4 percent to 3.5 percent, effective in January 2026. Kentuckians know best how to spend their money and do so more efficiently than the government.”

Prior to HB 8, the legislature worked to strengthen the state’s revenue policies, including intentional efforts to reduce debts and liabilities like those associated with public pensions; limiting borrowing; and placing an historic amount of money in the budget reserve.

Hicks credited the legislature’s efforts to build the budget reserve trust fund, specifically the deposit of budget surpluses into the fund. The budget reserve serves as the state’s savings account, and exists to prepare it for emergencies, difficult financial times, and opportunities. Lawmakers have implemented a budget philosophy that, similar to the approach Kentuckians must take in their own personal finances, emphasizes living within the state’s means in order to ensure the reserve remains strong. As a result, investments in the fund have risen from zero less than 15 years ago to more than $5 billion.

“Our approach to crafting the budget is aimed at meeting the state’s needs and identifying areas that we can invest in that provide the greatest return for Kentuckians,” Petrie added. “We do not budget with the intent of spending every available dollar. Instead, like Kentucky families, created a structural surplus, something we know will be there if and when we need it.”

According to official reports, state revenue appears to be holding strong. General Fund receipts for Fiscal Year 2024 (FY24) totaled $15,571.3 million, exceeding FY23 total revenue by $423.6 million, or 2.8%. Road Fund revenues totaled $1,874.6 million, $121.3 million, or 6.9% greater than the FY23 total. That forecasted surplus was appropriated to the Biennial Highway Plan in the 2024 legislative session.

In addition, investment income continues to emerge as a significant General Fund revenue source has occurred in a span of just two fiscal years: $300 million in FY24 and $150 million in FY23, due to higher investible balances and favorable rates of return.

Lawmakers will continue to monitor state revenue and spending as they prepare for the 2025 Regular Session to convene in January, at which point they will consider enacting legislation for the individual income tax decrease. As the lawmaking branch of state government, the Kentucky General Assembly is the only entity with the authority to lower the tax.

The post Kentucky on track to see third decrease in state income tax in 2026 appeared first on The Advocate-Messenger .