Kentucky residents can likely expect a vote on another cut in state taxes on personal income when the General Assembly reconvenes in January for the 2025 legislative session.

This afternoon, state budget director John Hicks announced at a meeting of the interim Joint Committee on Appropriations and Revenue that the state had met the “revenue conditions” set out in state law for lawmakers to consider a vote on the income tax cut. If lawmakers act in the 2025 session, Kentucky’s income tax rate could drop to 3.5 percent in January 2026. That represents a state income tax cut for Kentucky taxpayers of about $600 million.

Kentucky is one of 41 states that impose taxes on individual income and one of 12 states that use a uniform income tax structure. Other states with individual income taxes use variable tax rates. Nine states, such as Tennessee, impose no taxes on individual income (with some exceptions).

A flat income tax rate of 3.5 percent would put the state in a strong position to compete with states in the region for high-skilled workers, businesses and entrepreneurs. Pro-growth tax reform — which emphasizes reducing taxes on individual income — is the top priority of the Kentucky Chamber of Commerce.

“Today’s news is the result of hard work by Kentucky’s leadership and the Chamber’s tireless dedication,” said Ashli ​​Watts, president and CEO of the Kentucky Chamber of Commerce. “Reducing the income tax is the Chamber’s top priority and will help make Kentucky more economically competitive. We look forward to working with the General Assembly in 2025 to pass legislation that will continue the progress we have made on tax reform.”

In the 2022 session, lawmakers passed House Bill 8, which enshrined in law a process for gradually and prudently reducing income taxes. This bill directed the Office of the State Budget Director to conduct an analysis of two specific measures at the end of each fiscal year. First, the state’s Budget Reserve Trust Fund must equal 10 percent of state revenues. Second, revenues for the given year must exceed state appropriations by the equivalent of a 1 percentage point reduction in the income tax rate. If both conditions are met, the General Assembly may consider reducing the income tax rate by 0.5 percentage points in the next session. Assuming legislation is passed, this tax rate reduction would take effect at the beginning of the next calendar year.

Since 2022, lawmakers have cut the income tax from 5 percent to 4 percent, relieving taxpayers of more than $1.2 billion in income tax each year. The General Assembly began reforming Kentucky’s tax code in the 2017 session, passing legislation to modernize the corporate tax, expand the sales tax base and create a flat income tax that reduced most taxpayers from about 6 percent to 5 percent.

As a result of this work, the Tax Foundation updated Kentucky’s business tax climate from No. 37 in 2018 to No. 18 in 2023. Competing states like North Carolina and Indiana rank ahead of Kentucky at No. 9 and No. 10, respectively. However, Kentucky is moving ever closer to Tennessee at No. 15 and Missouri at No. 12. The Commonwealth’s tax competitiveness has surpassed states like Ohio, West Virginia and Illinois.

While policymakers have continued the important work of state tax reform, the state budget has continued to grow, allowing for critical investments in priority areas such as education, economic development, child care, public safety and job training. Last session, lawmakers approved $2.7 billion from the state’s Budget Reserve Trust Fund for education, infrastructure and health projects. Taking these spending into account, the Office of State Budget Director projects a Budget Reserve Trust Fund balance of $3.5 billion at the end of fiscal year 2026.

The Kentucky Chamber has been at the forefront of advocating for pro-growth tax reform in the Commonwealth. That work has included a close partnership with the Tax Foundation, which released a comprehensive guide to tax reform in 2021 and a study of Kentucky’s sales tax base in 2024. The Chamber has also published a guide to House Bill 8, produced a report on how tax reform can grow Kentucky’s economy, and highlighted the importance of tax reform in Kentucky’s Winning Strategy, a long-term vision plan to advance the Commonwealth.

The Office of the State Budget Director will release a more detailed report on the revenue terms of House Bill 8 in the coming days. This article may be updated with more information.