Kentucky’s tax revenue projected to shrink. GOP legislature still signals OK for tax cut.
For just the third time in the last 50 years, Kentucky’s total tax revenue receipts are projected to decline.
Though powerful Republicans say a recent report projecting that result won’t change their plans to cut the income tax from 4% to 3.5%, others warn such a move could push the state to the financial brink.
According to a report submitted by the State Budget Director John Hicks’ office late last month, revenue for Fiscal Year 2025 – which began July 1, 2024 – is expected to drop 1.4%, or by $223 million, compared to last fiscal year.
The report cites declining income tax revenue since the personal income tax rate has dropped, slowing growth in the recently expanded sales tax and a timing issue on collections for a special corporate tax as the primary culprits for the expected decline.
In total, General Fund revenue for Fiscal Year 2025 is projected at $15.36 billion compared to $15.57 billion last fiscal year.
Some budget hawks are ringing the alarm at this decline and warning against further cutting the income tax, which still generates about a third of all General Fund revenue. That includes Kentucky Center for Economic Policy Executive Director Jason Bailey, a regular opponent of the GOP-backed income cuts.
“In addition to a shortfall in the income tax, they also have an absolute decline in revenue. The other two times that’s happened in the last 50 years have been during recessions,” Bailey said. “We’re not in a recession, we’re in a booming economy. Our revenue is going down this year and that means less money for key services.”
The largest spending item in Kentucky’s General Fund budget by far is K-12 education, totaling about 39% of all spending. That’s followed by Medicaid at 18.6%, criminal justice at 12.9% and postsecondary education at 10.3%.
The latest report, summarizing first quarter financial data on state revenue and expenses, states that the primary reason for the change in forecast is corporations paying a tax — the “pass-through entity tax” — in last fiscal year but claiming the corresponding tax credits during this fiscal year.
“This asynchronized timing inflated FY24 collections in the individual income tax and will reduce expected FY25 receipts,” Hicks wrote.
Cutting the income tax is a long-prioritized policy item for statehouse Republicans, who own four-fifths majorities in both chambers of the state legislature. Since 2022’s passage of the landmark “trigger” tax cut system intended to eventually eradicate the state’s income tax, Republicans have already approved two half-point drops from 5% to cut the rate to 4%.
Given that they hit the statutory “triggers” related to revenue and savings earlier this year, the legislature has the authority to drop the rate down to 3.5%. Bailey is hoping that legislators will pump the brakes on those plans given the new report.
However, the state representatives leading committees on Appropriations & Revenue in the House and Senate have expressed a commitment to getting to 3.5%, and passing a bill that finalizes the drop first thing this January when the legislative session commences.
“We will closely monitor the latest revenue projections, but the figure is manageable within our current budget, even with the planned income tax reduction factored in. We crafted a conservative budget to prepare for scenarios like this,” Sen. Chris McDaniel, R-Ryland Heights, wrote. “The enacted budget includes a significant buffer for the reduction, which would take effect in January 2026, ensuring it does not impact FY 2025 or the first half of FY 2026.”
Though state Democrats are, by and large, more skeptical of income tax cuts, Democratic Gov. Andy Beshear’s track record on the issue is mixed. In 2022, he vetoed the bill setting up the incremental phase out of the tax, but signed a 2023 bill affirming the cut from 4.5% to 4%.
Beshear’s office did not respond to questions regarding his support for another income tax decrease. He could veto the bill affirming the cut, which would require a veto override from a majority of both the House and Senate.
Some powerful Republicans have expressed hesitance at cutting personal income tax rates all the way to zero.
“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 the legislature approves 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.
