Kentucky's Income Tax Cut: A Step Towards Economic Growth or Fiscal Uncertainty?

As Kentucky lawmakers send a bill to cut the state's individual income tax rate to Democratic Gov. Andy Beshear, who supports the measure, the Bluegrass State takes a significant step towards promoting economic growth and population gains. The proposed tax cut, which will lower the rate from 4% to 3.5% effective January 1, 2026, is expected to save taxpayers an estimated $718 million annually (Petrie, 2023). However, the long-term fiscal implications and potential economic benefits and drawbacks of this move warrant careful consideration.



The income tax cut aligns with the broader economic and fiscal policies of the current administration and legislature, which are focused on promoting economic growth and population gains in Kentucky. Since gaining full control in 2017, the Republican-controlled legislature has made reducing the individual income tax rate a top priority. The tax cut is part of a broader trend of reducing the personal income tax rate in Kentucky, with the state having already reduced its rate from 5% in 2022 to 4.5% in 2023 (Bailey, 2023).

Supporters of the income tax cut argue that the lower tax rate will promote long-term economic growth and population gains in the Bluegrass State by enabling people to keep more of the money they earn. This could lead to increased consumer spending, investment, and job creation. However, critics warn that the cumulative effect of income tax cuts could pose challenges to Kentucky's ability to raise sufficient revenue to fund its needs, potentially leading to budget shortfalls and cuts in critical investments in areas such as education, health, and public safety.

Moreover, the National Association of State Budget Officers predicts a "return to normal" for state budgets in 2025, with a decline in revenue growth and an end to the widespread surpluses experienced during the COVID era (NASBO, 2023). In Kentucky, Democratic Gov. Andy Beshear's budget office recently projected a 1.4% decline in state General Fund revenue for the current fiscal year compared to last year, which would be the first revenue decline not caused by an economic recession (Beshear, 2023).

In conclusion, while the proposed income tax cut in Kentucky may provide short-term relief to taxpayers and promote economic growth, it could also pose long-term challenges to the state's ability to fund critical investments and maintain a balanced budget, especially as revenue growth returns to more normal levels. As Kentucky lawmakers and the governor work together to implement this tax cut, they must carefully consider the potential fiscal implications and ensure that the state's budget remains balanced and sustainable in the long run.