Continue making Kentucky competitive again: Reduce personal income tax rate

FOR IMMEDIATE RELEASE: Friday January 3, 2025  

Contact: Jim Waters @ (270) 320-4376 or jwaters@freedomkentucky.com

Frankfort, Ky. – When state lawmakers return to Frankfort next week to begin the 2025 General Assembly session, they have the opportunity to continue fueling Kentucky’s economic revival by approving yet another drop in the commonwealth’s individual income tax rate.

Revenue requirements needed to trigger a further half-percent reduction in the commonwealth’s individual income tax rate – lowering it to 3.5% in 2026 – were met during the state’s 2024 fiscal year, which concluded on June 30.

Established by House Bill 8 (HB 8) – passed during the 2022 legislative session – those conditions involving the state’s General Fund require that:

·      budget reserves are at least 10% of revenues at the end of the fiscal year;

·      revenues would have exceeded spending even if the tax rate had been one percentage point lower; and

·      lawmakers give final approval during the next legislative session to implement the reduction during the following calendar year.

Two of the three conditions have been met so far.

State Budget Director John Hicks informed the Interim Committee on Appropriations and Revenue that a $2 billion General Fund surplus at the end of Fiscal Year 2024 on June 30 swelled budget reserves to more than $5 billion. Considering expenditures for one-time projects – with some being funded over multiple years – economic forecasters indicate the rainy day fund will stand at around $3.5 billion, or nearly 22% of expected revenues, by the end of fiscal year 2026. This more than meets the 10% reserves-to-revenue ratio.

“We encourage lawmakers to continue improving Kentucky’s economic competitiveness by reducing reliance on income taxes, which discourages productivity, while continuing to move toward the type of pro-growth tax structure that defines the revenue policies – and fiscal success – of our competitor-states,” said Jim Waters, president of the Bluegrass Institute for Public Policy Solutions, a free market think tank. “They should ignore the monotonous, predictable voices of those who claim that reducing the individual income tax rate will threaten Kentucky’s ability to fund state government and its essential services. These voices will never be satisfied, no matter how high taxes are raised or spending increases.”

Lowering the personal income tax rate to 3.5% would mean that by the end of 2026, Kentuckians earning $75,000 a year would have saved more than $1,100 since HB 8 became law.

All that remains for the next rate reduction is lawmakers’ final approval when they reconvene next week.

“There have been historic increases in state tax revenues since state lawmakers began reducing the individual income tax rate three years ago – confirming once again the historically proven maxim: allowing individuals to keep – and make the decisions about spending – their own hard-earned dollars not only increases their own prosperity but benefits government, too,” Waters added. “By exercising the discipline to spend on needs, not wants, state lawmakers have made it possible to take yet another step in making Kentucky competitive again. May they not hesitate to do so.”