Kentucky qualifies for lawmakers to cut income tax in 2026

FRANKFORT, Ky. (AP) — Kentucky has met the financial requirements for another cut in the state’s personal income tax rate that could take effect in 2026, top GOP lawmakers said Wednesday.

State budget officials confirmed that financial triggers have been met, clearing the way for lawmakers to cut the state’s personal income tax rate from 4% to 3.5%, effective January 2026, said Sen. Chris McDaniel. The GOP-dominated Legislature could vote to lower the rate when it reconvenes next year.

“Kentuckians know how to spend their money best, and they do it more efficiently than the government,” McDaniel, chairman of the Senate Appropriations and Revenue Committee, said in a statement. “We’re proud to help them and their families keep more of their hard-earned money.”

This is a reversal from a year ago when the Bluegrass State failed to meet all financial conditions, meaning the corporate tax rate will remain at 4% in January.

Since GOP lawmakers passed a tax overhaul bill in 2022, the personal income tax has been gradually cut by half a percentage point, provided that criteria are met to ensure revenues are sufficient to cover state spending.

For many supporters of this groundbreaking legislation, the goal was to finally phase out individual income taxes in Kentucky, shifting tax collections toward personal consumption and away from personal income. The 2022 measure also expanded the state’s sales tax to more services.

House Appropriations and Revenue Committee Chairman Jason Petrie, a key sponsor of the tax reform, said Wednesday that the latest tax cut is the result of a disciplined approach to the state budget.

“We were willing to make tough decisions when it comes to our budget and prioritize meeting our needs over spending on whims,” Petrie said in a statement. “As a result, we continue to see our plan working. We are on track to eliminate Kentucky’s personal income tax, and we are doing so while providing essential programs that Kentuckians depend on.”

McDaniel said Kentucky lawmakers were able to cut the personal income tax while also strengthening public pension systems and making important investments in education.

The latest income tax rate cut is expected to receive strong GOP support. But there could be internal debate among Republican lawmakers in future years about how low the income tax rate can go without changing other taxes to meet state spending needs.

Meanwhile, critics of the income tax phaseout have warned that it would ultimately deprive essential government services of sufficient revenue. But when the state failed to meet the trigger a year ago, halting its income tax cuts, Petrie and McDaniel said it showed that the process was working as intended to protect essential government services.

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

The financial conditions set forth in state law necessary to trigger the personal income tax cut require that the balance in the Budget Reserve Fund be equal to at least 10 percent of the state’s General Fund revenues and that General Fund revenues exceed the appropriations and cost of the 1 percent state income tax cut.