Kentucky meets conditions for lawmakers to cut income tax in 2026

Republican lawmakers say Kentucky has met the financial conditions to set in motion another cut in the personal income tax rate that could take effect in 2026

Diversity Education Kentucky (Copyright 2020 The Associated Press. All rights reserved.)

Kentucky has met the financial conditions needed to set in motion another cut in the state's personal income tax rate that could take effect in 2026, top Republican lawmakers said Wednesday.

State budget officials confirmed the financial triggers were satisfied, clearing the way for lawmakers to reduce the individual income tax rate to 3.5% from 4%, effective in January 2026, said Sen. Chris McDaniel. The GOP-dominated legislature can pass the rate cut when it reconvenes next year.

“Kentuckians know best how to spend their money and do so more efficiently than the 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's a reversal from a year ago, when the Bluegrass State failed to fully meet the financial conditions, meaning the income tax rate will hold steady at 4% this coming January.

Since Republican lawmakers passed a tax overhaul in 2022, the personal income tax has gradually been reduced by increments of a half-percentage point, conditioned on meeting benchmarks that ensure revenues are sufficient to meet state spending needs.

For many supporters of that landmark legislation, the goal has been to eventually phase out individual income taxes in Kentucky, shifting tax collections toward personal consumption and away from personal income. That 2022 measure also extended the state sales tax to more services.

House Appropriations and Revenue Committee Chairman Jason Petrie, the tax overhaul's lead sponsor, said Wednesday that the latest tax cut is the result of a disciplined approach to state budgeting.

“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,” Petrie said in a statement. "As a result, we continue to see our plan is working. 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.”

McDaniel said Kentucky lawmakers have been able to reduce the individual income tax while also shoring up public pension systems and making important investments in education.

The latest income tax rate cut is expected to draw strong support from the GOP. But in future years, an internal debate among Republican lawmakers could emerge on how low the income tax rate can go without perhaps necessitating changes in other taxes to meet state spending needs.

Meanwhile, critics of the income tax phase-out have warned it eventually will deprive essential state services of sufficient revenue. But when the state failed to meet the trigger conditions a year ago, pausing the income tax cuts, Petrie and McDaniel said it showed the process was working as intended to protect necessary government services.

Democratic Gov. Andy Beshear, who has presided over record-setting economic development growth during his tenure, said in a social media post that the prospect of another individual income tax rate cut in 2026 was more good news for the state. Republican lawmakers have attributed the strong economic growth to business-friendly policies they passed.

The financial conditions, set in state law, needed to trigger the individual income tax cut require a balance in the Budget Reserve Trust Fund equal to at least 10% of state General Fund revenue, and that General Fund revenues exceed appropriations and the cost of a 1% reduction in the state income tax.