By: Patrick Flannery
Representative, State of Kentucky
Last month, the state budget director released a very positive revenue report that showed the legislature’s work to reform the state’s budget and update Kentucky’s outdated tax structure is working. For the third year in a row, we had more than a billion dollars left unspent, with revenue far exceeding expectations.
The report also proves that the individual income tax cut passed by the legislature last year is helping working men and women and benefitting our communities. That cut is expected to save Kentuckians $625 million this year alone, while another cut will provide more relief in 2024. It is not all good news as emergency expenditures caused the state to miss the target for a cut in 2025. However, it looks like we will remain on track to eliminate the tax entirely and now have evidence that the tax cuts will not endanger necessary government programs. In other words, we may be slowing down to assess the situation, but you can be sure we are not losing our momentum.
In 2022, lawmakers passed HB 8, a historic tax modernization package that included provisions to eliminate the state’s individual income tax gradually over time. That measure required that certain conditions be met before the tax could be decreased in increments of half a percent. The first condition, sometimes called a trigger, requires our Budget Reserve Trust Fund to have enough money in it to equal 10% or more of General Fund revenues from the previous year. The budget reserve is our state’s savings account, designed to prepare us for hard times and opportunities. That condition was met and far exceeded as the legislature has placed a historic amount in the fund over the past few years.
The second condition requires the state’s revenues to at least equal state appropriations plus the cost of a 1% reduction in the individual income tax rate. In simple terms, that means the state needed to bring in around $1.2 billion more than the legislature appropriated for the fiscal year that ended in June before another tax cut can be considered.
The state met both conditions at the end of the last two fiscal years, so the individual income tax was cut from 5% to 4.5% earlier this year, and will be cut to 4% in January of 2024. However, while we had a historic surplus of more than $1.5 billion and strong state revenue, the state fell $435 million short of the goal required. From reviewing the information provided by the budget director’s office and our own budget staff, we know one of the biggest contributing factors was emergency response spending after the horrific flooding in Eastern Kentucky and other emergency spending by the executive branch. Emergencies require a state response, but we will be reviewing the spending to determine if the money was spent appropriately. After all, we can look no further than the more than $20 million in emergency funding used by the governor to set up field hospitals in Lexington and Louisville during the pandemic. They were built without evidence they were needed, and neither ever housed a single patient. We will also continue our work to craft another budget that places our state’s needs before the wants of those who believe that government should be bigger.
In the meantime, the bottom line is that the plan is working. We are on track to eliminate Kentucky’s individual income tax, and we are doing so without endangering the necessary programs that Kentuckians depend on. The plan was crafted thoughtfully and intentionally, and careful consideration was given to including the conditions in order to exercise an abundance of caution. Despite this fact, there were some who fought the tax cuts, including the governor when he vetoed part of the bill. This slow down proves wrong those who claimed HB 8 would lead to a disaster.
Today we have proof that the formula is working as it was designed to work. All factors, including this year’s revenue report, show that Kentucky is still on track to eliminate the individual income tax and point toward promising conditions for a third cut to the tax in 2026.
As always, I can be reached anytime through the toll-free message line in Frankfort at 1-800-372-7181. You can also contact me via e-mail at Patrick.Flannery@lrc.ky.gov. You can also keep track of committee meetings and potential legislation through the Kentucky legislature’s home page atlegislature.ky.gov.