Kentucky tax revenues in the fiscal year ending this summer were just shy of what was needed to trigger a half-percent cut to the state’s individual income tax rate in the 2027 calendar year.
An Aug. 15 letter from State Budget Director John Hicks to the Republican chairmen of legislative budget committees informed them the state’s General Fund revenue fell $7.5 million short of what was needed to trigger cutting the tax rate from 3.5% to 3% in 2027.
Kentucky hit the tax cut trigger last summer, which will lower the current income tax rate of 4% down to 3.5% at the beginning of next year.
In the 2023 fiscal year, the trigger was missed by a much larger margin than this year, falling $435 million short.
The Kentucky General Assembly created the complicated tax cut mechanism in 2022, aimed at incrementally lowering Kentucky’s individual income tax rate by .5 percentage points until it is eventually eliminated. The rate is lowered so long as the state budget reserve trust fund is at least 10% of General Fund revenue at the end of a fiscal year, and such revenue would have exceeded General Fund spending even if the tax rate had been one percentage point lower.
Amid frustration by some Republicans that tax cut triggers would become harder to reach in future years, the legislature passed a bill in the 2025 session to make hitting the triggers easier. Under that bill, if the trigger was not met for a half-point reduction, it could still trigger a reduction of .25 percentage points if state revenue was somewhat close.
However, this change to Kentucky’s tax cut trigger mechanism will not go into effect until the end of the current fiscal year next summer.
Sen. Chris McDaniel, the GOP chairman of the Senate budget committee from Ryland Heights, told Kentucky Public Radio that if this change had been in effect this summer, the state would have easily hit the smaller tax cut of .25 percentage points, instead of missing the trigger entirely.
As for this past fiscal year, McDaniel knew the state’s odds of hitting the trigger would be “right on the razor’s edge,” citing the tax deadline being moved back from April to November because of severe flooding earlier this year.
Asked if the legislature may return to tinkering with the trigger mechanism in the 2026 legislative session beginning in January, McDaniel said he didn’t foresee the Republican supermajority making any “significant” changes.
“The formula has proven itself to be very useful,” McDaniel said.
The state’s failure to hit the tax cut triggers this year was first reported Thursday by the Kentucky Lantern, who received confirmation from McDaniel.
Jason Bailey, the executive director of progressive think tank Kentucky Center for Economic Policy, said in a statement that Kentucky missed the tax cut triggers “despite the legislature moving the goalposts to make achieving it easier.” This was a reference to a Republican bill in 2024 that included language exempting $2.5 billion of spending on infrastructure projects from counting under the trigger mechanism.
“The state failing to meet its tax cut trigger this year is a small sigh of relief for every Kentuckian who relies on the success of our schools, hospitals and other vital services,” Bailey stated. “But it comes on top of news of an expected shortfall this fiscal year due to the income tax cuts the legislature has already made and a weakening economy due to unwise federal policies.”
Gov. Andy Beshear said Thursday that the economic effects of President Donald Trump’s new tariffs and the upcoming state income tax cut that will go into effect next year are likely to cause shortfalls in state revenue this current fiscal year.
A fiscal note produced by legislative staff this year estimated that cutting the income tax rate from 4% to 3.5% — which will take place at the beginning of 2026 — would lower Kentucky’s General Fund revenue annually by $718 million in future years.
Republicans in Frankfort have touted the tax cuts they’ve passed over the past decade as one of the major reasons for the state’s economic success. They often criticize Beshear for taking the credit when companies announce major economic development investments, saying their tax policies and budget restraint are what is truly spurring economic growth.
State government and politics reporting is supported in part by the Corporation for Public Broadcasting.
