Kentuckians on pace to get another income tax cut

(The Center Square) – Kentucky lawmakers got the green light they needed to file legislation further cutting the state’s personal income tax when they return to Frankfort in January for the 2025 General Assembly session.

The Office of the State Budget Director notified lawmakers during the Interim Joint Committee on Appropriations and Revenue that requirements lawmakers established two years ago when they passed tax reform legislation over Gov. Andy Beshear’s veto have been met. As a result, lawmakers say they plan to file a bill next year to reduce the income tax rate from 4% to 3.5% starting in 2026.

House Appropriations and Revenue Chair Jason Petrie, R-Elkton, said in a statement that Kentucky is on track to eventually eliminate the income tax.

“We’ve been willing to make tough decisions when it comes to the budget and to place an emphasis on meeting our needs rather than spending on wants,” he said. “As a result, we continue to see our plan is working.”

Under the 2022 law, the legislature can enact a .5% tax cut if the state’s rainy day fund, the reserve amount set aside to cover money needed for emergencies or other unexpected expenses, equals 10% or more of the General Fund revenue at the end of a fiscal year. The General Fund revenue must also have been able to cover that fiscal year’s spending if the tax rate was 1% lower.

If lawmakers approve the tax cut, as expected, it will mark the third time since House Bill 8’s passage that the personal income tax rate has been slashed.

“Today’s report from the state budget director confirms what we have been saying for over a decade: Conservative budgeting is best for Kentuckians,” Senate Appropriations and Revenue Chair Chris McDaniel, R-Ryland Heights, said in a statement. “Over the past decade, we have grown the state’s reserve from $0 to over $5 billion.”

Currently, only seven states have no personal income tax, although two other states – Washington and New Hampshire – apply their levies only on investment income and not on wages.

Among the states without any income tax are Tennessee and Florida. While the most recent IRS migration data showed that Kentucky received more residents from neighboring Tennessee than vice versa, the Volunteer State still came out on top in the income exchange. In 2022, Kentucky gained 508 residents, but Tennessee received $44.1 million in new income.

The Bluegrass State also experienced a net loss of 1,665 residents to Florida, with a collective adjusted gross income equaling $291.7 million headed to the Sunshine State.

Kentucky Chamber of Commerce President and CEO Ashli Watts praised Wednesday’s report, saying it showed lawmakers have been committed to reducing the income tax. The Chamber was an ardent supporter of HB 8.

“Reducing the income tax is the Chamber’s top priority and will help make Kentucky more economically competitive,” she added.