State on track to see the next individual income tax cut in 2026

By Rep. Daniel Elliott

Six years ago Kentucky’s individual income tax was 6%. While that seems like a low number, consider that the average Kentuckian worked the first three full weeks of January, 15.6 work days to be exact, just to pay their annual individual income tax.

While taxes are a necessary function of government if we are going to fund law enforcement, build roads, and fund education, it is important that our tax system supports rather than hinders people’s well-being. After all, taxes should not be a burden that stifles the aspirations of individuals or communities. With this in mind, the legislature lowered the income tax to 5% in 2018 as part of a major tax modernization.

Four years later, after navigating the pandemic and the shutdown, 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, including language that requires the Budget Reserve Trust Fund to have enough money in it to equal 10% or more of General Fund revenues from the previous year. The measure was vetoed by Governor Andy Beshear, but the veto was later overridden by the House and Senate. As a result of HB 8, the individual income tax was lowered to 4.5% in 2023, and 4% in January of this year. These cuts left more than a billion dollars a year in Kentucky paychecks, right where they belong.

While we did not meet the conditions necessary to cut the tax again in January 2025, mostly because of emergency-related spending, we now have evidence that the provisions of HB 8 work to not only lower taxes, but protect funding for the programs Kentuckians rely on. And economists were very optimistic about reaching the necessary triggers this year.

On August 21, members of the Interim Joint Committee on Appropriations and Revenue received notification that the conditions required to lower the state’s personal income tax to 3.5% in January 2026 have been met, clearing the way for lawmakers to consider doing so during the 2025 Regular Session.

Of course, we have not arrived here by accident. The legislature worked to strengthen the state’s revenue policies, including efforts to reduce debts and liabilities like those associated with public pensions; limit borrowing; and place an historic amount of money in the budget reserve. At the same time, we have provided record funding for K-12 public education (even after inflation) and devoted billions to roads, broadband, and water lines in every county.

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.

According to official reports, state revenue appears to be holding strong. General Fund receipts for Fiscal Year 2024 (FY24), which ended June 30, 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 is continuing to grow into a major General Fund revenue source. The state made $300 million in FY24 and $150 million in FY23 because of higher investible balances and favorable rates of return.

Of course, we will continue to monitor state revenue and spending as we prepare for the 2025 Regular Session and consider enacting the next tax cut. However, with Kentuckians paying more to put gas in their car and food on their table, knowing that we are on track for another cut is powerful.

As always, I can be reached anytime through the toll-free message line in Frankfort at 1-800-372-7181. You can also contact me via e-mail at Daniel.Elliott@lrc.ky.gov and keep track through the Kentucky legislature’s website at legislature.ky.gov .

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