Kentucky has met the revenue conditions to lower the state income tax rate from 4% to 3.5%.
State Budget Director John Hicks presented the FY24 year-end budget report to the Interim Joint Committee on Appropriations and Revenue this week, highlighting that sufficient revenue was generated above FY23 totals to trigger a potential reduction in the tax rate. The General Assembly will have the opportunity to enact this tax reduction during the 2025 legislative session, with the change potentially taking effect in January 2026.
This potential tax cut is part of the framework established by HB 8, passed during the 2022 legislative session, which set revenue benchmarks for gradually lowering the income tax rate. Kentucky's personal income tax rate dropped from 5% to 4.5% in 2023 and went down to the current rate of 4% on Jan. 1, 2024.
Any reduction still requires affirmative action by state lawmakers to be implemented.
Hicks also provided reports on General Fund and Road Fund receipts.
General Fund revenue
Kentucky’s General Fund revenues have continued to remain strong, meeting budget estimates for FY24. Actual revenue for FY24 totaled $15.6 billion, marking a 2.8% increase from FY23.
Income tax receipts remained relatively stable, experiencing only a 0.6% decline despite reductions in the income tax rate. Sales tax receipts continued to see growth, with a 4.1% increase from the previous year, though this growth has slowed after three years of double-digit increases.
Strong General Fund receipts have enabled the state to further grow the Budget Reserve Trust Fund, commonly known as the Rainy Day Fund. The FY24 ending balance for the fund is estimated at $5.2 billion.
Road Fund revenue
The state Road Fund also continues to see growth, although the fund missed budget estimates by 7.1%. Actual revenue for FY24 totaled $1.9 billion, a 6.9% increase from FY23.
Motor fuels tax receipts reached record levels, totaling $905.4 million, a 13.4% increase from FY23. This significant growth was driven largely by an automatic increase in the motor fuels tax rate, which rose to 30.1 cents per gallon for FY24, based on the average wholesale price of gasoline. This growth is unlikely to continue, as the tax rate has decreased to 27.8 cents per gallon for FY25.
Motor vehicle usage tax receipts also continued to grow, increasing 1.6% year-over-year.
