Members of the interim Joint Committee on Appropriations and Revenue were officially informed that the conditions for reducing the state income tax to 3.5% in January 2026 have been met.

In 2022, lawmakers passed HB 8, a historic tax modernization package that included provisions to phase out the state income tax. This measure required certain conditions to be met before the tax could be reduced in half-percent increments. The first condition requires that our Budget Reserve Trust Fund have enough money to equal 10% or more of the previous year’s General Fund revenues.

“Today’s report from the state budget director confirms what we have been saying for over a decade: conservative fiscal management is best for Kentucky residents. Over the last decade, we have grown the state’s reserves from $0 to over $5 billion,” said Chris McDaniel, R-Ryland Heights, chairman of the Senate Appropriations and Revenue Committee. “At the same time, we have stabilized and made solvent the nation’s worst-funded pension systems, made historic investments in education, and reduced the income tax from 6 percent to 4 percent. Today, we learned that we can take legislative action this January to reduce the state income tax from 4 percent to 3.5 percent, effective January 2026. Kentucky residents know best how to spend their money, and they do it more efficiently than the federal government.”

Before HB 8, lawmakers worked to strengthen the state’s revenue policies. This included targeted efforts to reduce debt and liabilities, such as those related to public pensions, limiting borrowing, and placing a historic amount of money in the budget reserve.

Hicks praised the legislature’s efforts to build the budget reserve trust fund, particularly the deposit of budget surpluses into the fund. The budget reserve serves as the state’s savings account and is designed to prepare it for emergencies, difficult financial times and opportunities. Lawmakers have implemented a budget philosophy that — similar to the approach Kentuckians must take with their own personal finances — emphasizes living within the state’s means to ensure the reserve remains strong. As a result, investments in the fund have grown from zero less than 15 years ago to over $5 billion.

“Our approach to developing the budget is to meet the needs of the state and identify areas where we can invest to provide the greatest benefit to Kentucky residents,” Petrie added. “We are not planning our budget with the intention of spending every available dollar. Instead, like Kentucky families, we have created a structural surplus that we know will be there when we need it.”

According to official reports, state revenues appear to be holding steady. General Fund revenues for fiscal year 2024 (FY24) totaled $15,571.3 million, exceeding FY23 total revenues by $423.6 million, or 2.8%. Road Fund revenues totaled $1,874.6 million, $121.3 million, or 6.9%, more than FY23 total revenues. This projected surplus was allocated to the two-year highway plan in the 2024 legislative session.

In addition, investment income continues to be a significant source of revenue for the General Fund, having been achieved in just two fiscal years: $300 million in fiscal year 2024 and $150 million in fiscal year 2023, due to higher investable balances and more favorable returns.

Lawmakers will continue to keep an eye on the state’s revenues and spending as they prepare for the 2025 regular session, which will be held in January. At that time, they will consider passing legislation to cut the income tax. As the legislative branch of state government, the Kentucky General Assembly is the only body with the power to cut the tax.