As Kentucky meets conditions to drop income tax to 3.5%, Republican lawmakers cheer
The Kentucky state budget has met the requirements for another cut to the personal income tax.
If approved by the General Assembly next year, the state personal income tax rate would drop from 4% to 3.5%.
The announcement of the state meeting certain financial criteria to do so was made by Sen. Chris McDaniel, R-Ryland Heights, Wednesday. McDaniel expressed excitement in a post to social media site X, formerly Twitter, where he shared that State Budget Director John Hicks informed him of the news.
“We have met the conditions to reduce the individual income tax rate to 3.5%! 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,” he wrote.
The criteria, or “triggers” necessary to cut the state’s income tax — a key source of revenue for state programs — are prescribed in statute.
The law requires a balance in the Budget Reserve Trust Fund equal to least 10% of the general fund revenue and that state general fund revenues exceed appropriations and the cost of a 1% reduction in the state income tax.
Once those triggers are met, the legislature must approve the cut before it takes place the following calendar year.
That would mean the move from 4% to 3.5% personal income tax rate is likely to kick into effect Jan. 1, 2026.
Around this time last year, the state did not meet the above criteria, meaning that the income tax rate will hold at 4% this upcoming January.
Cutting the tax to 3.5% will likely not be an issue in a statehouse dominated by four-fifths Republican majorities in the House and Senate.
Though certain rifts exist within the large GOP caucuses, tax cuts aren’t one of them.
Via 2022’s House Bill 8, the legislature is on a course to get to zero income tax. However, members of Republican leadership have recently expressed doubts about getting there.
“I think we have to be realistic with the fact that growth will not carry us beyond 3% in the foreseeable future,” House Speaker David Osborne, R-Prospect, told the Herald-Leader earlier this year.
After 3%, it gets dicey, he said. The state could be faced with a choice of either holding at 3% income tax rate or raising the state’s 6% sales tax, which could prove politically toxic.
If lowered to 3.5%, the cuts from the initial 5% income tax rate in 2022 will save a Kentuckian making $50,000 a year roughly $750. Kentuckians making $100,000 would save $1,500 per year. A person making $500,000 annually in the state would save about $7,5000 per year.
Jason Bailey, the executive director of the Kentucky Center for Economic Policy, has long been an opponent of the GOP-backed tax cuts. He argues that the state’s budgetary good fortunes are due in part to increased federal spending during the COVID-19 pandemic, and that it’s unwise to dramatically decrease a revenue stream in this moment.
“This was expected in the restrained spending that was included in the last budget. But it’s driven by a lot of one-time money that won’t necessarily recur as the economic effects of the pandemic stimulus fade,” Bailey told the Herald-Leader. “It’s not a good idea to enact permanent tax cuts of your historically largest revenue source based on unique and likely temporary conditions.”
