FRANKFORT, Ky. (AP) — Kentucky has met the necessary financial conditions to move ahead with another state income tax cut that could take effect in 2026, top Republican lawmakers said Wednesday.
State budget officials confirmed that the financial conditions have been met, clearing the way for lawmakers to cut the income tax rate from 4% to 3.5%, which is set to take effect in January 2026, Sen. Chris McDaniel said. The GOP-dominated legislature can pass the tax cut when it reconvenes next year.
“Kentuckians know best how to spend their money and do it more efficiently than the federal government,” McDaniel, chairman of the Senate Appropriations and Revenue Committee, said in a statement. “We are proud to help them and their families keep more of their hard-earned money.”
It is a Reversal compared to the previous yearwhen the Bluegrass State failed to fully meet financial conditions, meaning the income tax rate will remain unchanged at 4% next January.
Since Republican lawmakers passed tax reform in 2022, the income tax has been gradually cut in half-percentage point increments, subject to meeting certain benchmarks that ensure revenues are sufficient to meet government spending needs.
For many supporters of this landmark legislation, the goal was to gradually eliminate Kentucky’s income tax and shift tax revenue toward personal consumption and away from personal income. This 2022 measure also expanded the state sales tax to include more services.
House Budget and Revenue Committee Chairman Jason Petrie, the chief sponsor of tax reform, said Wednesday that the latest tax cut was the result of a disciplined approach to state budgeting.
“We have been willing to make difficult decisions when it comes to the budget and have placed an emphasis on meeting our needs rather than spending on wants,” Petrie said in a statement. “By doing so, we continue to see that our plan is working. We are on track to eliminate Kentucky’s income tax, and we are doing so while delivering the necessary programs that Kentuckians depend on.”
McDaniel said Kentucky lawmakers succeeded in cutting income taxes while strengthening public pension systems and making important investments in education.
The recent income tax cut is likely to be widely supported by Republicans. But in the coming years, there may be an internal debate among Republican lawmakers about how low the income tax can be cut without potentially requiring changes in other taxes to meet government spending needs.
Critics of the income tax phase-out meanwhile warn that it will ultimately deprive essential government services of sufficient revenue. But when the state failed to meet the requirements and suspended the income tax cuts a year ago, Petrie and McDaniel said it showed that the process was working as designed to protect necessary government services.
Democratic Gov. Andy Beshear, who has enjoyed record-breaking economic growth during his tenure, said in a social media post that the prospect of another income tax cut in 2026 was more good news for the state. Republican lawmakers attributed the strong economic growth to the pro-business measures they passed.
The financial requirements for a state income tax cut set forth in state law require that there be a balance in the Budget Reserve Trust Fund of at least 10 percent of state general budget revenues and that general budget revenues exceed the appropriations and cost of a one percent state income tax cut.
