Kentucky hits budget triggers for income tax rate cut in 2026

Kentucky’s individual income tax rate will be lowered to 3.5% at the beginning of 2026, as the state budget met the conditions to trigger such a cut at the end of the past fiscal year.

State Budget Director John Hicks told state legislators the tax cut triggers were met in a committee meeting Wednesday.

House Bill 8 passed into law in 2022 created a mechanism to incrementally lower Kentucky’s individual income tax rate by .5% until it is eliminated.

Under the mechanism, the tax rate is lowered so long as the state budget reserve trust fund is at least 10% of General Fund revenue at the end of a fiscal year, and such revenue would have exceeded General Fund spending even if the tax rate had been one percentage point lower.

Kentucky missed the latter tax cut trigger last summer , which prevented the lowering of the income tax rate from 4% to 3.5% in the 2025 calendar year.

Hicks told the interim budget committee that the 2024 fiscal year concluded at the end of June with a General Fund surplus of just more than $2 billion, bringing Kentucky’s budget reserve trust fund to more than $5 billion.

The 2022 tax cut law was a landmark bill of the Republican supermajority in Frankfort, which has long sought to shift the state from taxing production to taxing consumption. Republican leadership has also sought to keep state spending low enough to increase the chances of hitting the tax cut triggers.

State Sen. Chris McDaniel, the Republican chairman of the Senate budget committee from Ryland Heights, cheered news of the tax cut triggers being met on social media .

“This is great news reflecting the success of our conservative budgeting approach and our commitment to keep money in the pocket of Kentucky’s taxpayers!” McDaniel wrote on X, formerly known as Twitter.

Rep. Jason Petrie of Elkton, the GOP chair of the House budget committee and lead sponsor of HB 8, said in a statement that lawmakers have “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.”

“We are on track to eliminate Kentucky’s individual income tax, and we are doing so while providing for the necessary programs that Kentuckians depend on.”

Hicks told legislators he would submit a formal report to the interim budget committee after the meeting which indicated how the state budget met both conditions for a tax at the end of June.

In order for the tax rate to be reduced from 4% to 3.5% in 2026, the Kentucky General Assembly will still have to pass a bill in the 2025 session approving the cut.

State government and politics reporting is supported in part by the Corporation for Public Broadcasting.