Increased income in Kentucky falls short by nearly 1%, with sales and tax revenues failing to meet projected amounts.
Kentucky's state government revenue for the fiscal year ending June 30, 2023, showed a modest growth of 1%, reaching $15.7 billion. However, this growth was not reflected in the income and sales tax revenues, which were lower than anticipated.
Jason Bailey, executive director of the Kentucky Center for Economic Policy, expressed concerns about the revenue numbers for the last fiscal year. The income tax took in $5.3 billion, a decrease of $490 million compared to the previous year, and $227 million short of expectations. The sales tax, on the other hand, remained stable at $5.8 billion, but fell $250 million short of the budgeted expectations.
Despite these shortfalls, the strength in business taxes has demonstrated that Kentucky businesses are producing at a profitable level, according to the state budget director, John Hicks. The high revenues from business taxes helped to offset the weakness in sales and income tax revenue.
The income tax rate in Kentucky was reduced from 5% to 3.5% in stages between 2022 and 2026. This reduction is part of a broader plan to potentially eliminate income taxes, a goal shared by Kentucky's Republican supermajority. The 2022 law allows another half percentage point cut to be considered if certain conditions are met.
One such condition is that the Budget Reserve fund should be at least 10% of General Fund receipts, and revenue should still exceed General Fund spending with a 1% lower income tax rate. The end of the fiscal year raises the question of whether the state's fiscal condition is strong enough to allow another income tax cut, as per the 2022 law.
The growth in the Road Fund, which pays for highway construction and maintenance and other transportation programs, was flat in the 2025 fiscal year. The Road Fund brought in $1.86 billion for the year, which was $39 million more than anticipated in the state budget, but $11 million less than the previous year's revenue.
The conditions for another half percentage point cut will be evaluated by the State Budget Office, and the decision will be made during the 2026 General Assembly. State Sen. Chris McDaniel is uncertain whether the threshold will be met for another half percentage point cut, but the expectations for another income tax rate cut in Kentucky during the 2026 General Assembly are shaped by the state's fiscal condition and previous legislation.
It is important to note that the $132 million is a "revenue" surplus, but the final surplus after accounting for state spending for the year is likely to be smaller. The final surplus will be transferred to the state's Budget Reserve Trust Fund.
In conclusion, the future of income tax cuts in Kentucky depends on the state's fiscal performance and the ability to meet the conditions set out in the 2022 law. Balancing tax relief with maintaining budget stability and addressing other fiscal priorities will be crucial in making decisions regarding future tax cuts.
[1] Kentucky Center for Economic Policy. (2023). 2023 Fiscal Year Review: Kentucky's State Revenues. Retrieved from https://kypolicy.org/2023-fiscal-year-review-kentuckys-state-revenues/ [2] Kentucky General Assembly. (2025). House Bill 1. Retrieved from https://legiscan.com/KY/bill/HB1/2025 [3] Kentucky General Assembly. (2022). Senate Bill 1. Retrieved from https://legiscan.com/KY/bill/SB1/2022
- The decline in income tax revenue, with a decrease of $490 million compared to the previous year, and the sales tax revenue falling $250 million short of the budgeted expectations, raises concerns about Kentucky's economic future, as expressed by Jason Bailey, executive director of the Kentucky Center for Economic Policy.
- The high revenues from business taxes have demonstrated that Kentucky businesses are producing at a profitable level, but the strength in business taxes alone might not be sufficient to address the shortfalls in sales and income tax revenue, according to budget concerns shaping discussions during the 2026 General Assembly.
