Kentucky Lawmakers Finalize Income Tax Cut to 3.5%

The Kentucky General Assembly has passed a measure to reduce the state's individual income tax rate to 3.5%, a move hailed by Republican lawmakers as a key economic development strategy. The bill, House Bill 1 (HB1), now heads to Governor Andy Beshear's desk for his signature.

Gradual Rate Reduction

Since 2017, when the GOP gained control of the legislature, Kentucky's personal income tax rate has seen a steady decline. HB1 extends this trend, setting the stage for the reduction to 3.5% from 4% effective January 1, 2026.

Economic Growth and Population Gains

Supporters of the tax cut argue that it will stimulate economic growth by allowing individuals to retain more of their earnings. Senator Chris McDaniel (R) emphasized the General Assembly's commitment to lowering taxes whenever possible.

Concerns over Equity

Some Democrats expressed concerns about the potential impact on lower-income Kentuckians. Senator Cassie Chambers Armstrong (D) presented alternative proposals, including a refundable child tax credit and a sales tax exemption for diapers, to address the needs of struggling families.

Republicans Prioritize Economic Relief

Senator Michael Nemes (R) dismissed concerns about the tax cut benefiting the wealthy, stating that individuals earned their income and should not be penalized.

Budget Impacts

HB1 is expected to provide taxpayers with an additional $718 million in annual savings, according to supporters. House budget committee Chairman Jason Petrie indicated that the state's budget will remain balanced with the lower income tax rate.

Democratic Division

While Senate Republicans unanimously backed HB1, Democrats were divided on the issue. Senator David Yates (D) supported the bill but expressed concerns about eliminating the income tax altogether.

Future Prospects

The passage of HB1 raises questions about future tax cuts and the possibility of phasing out the individual income tax in Kentucky. Several Senate Republicans expressed their hopes for further reductions in the future. GOP Sen. Gex Williams indicated that incremental cuts of up to 1% could be considered during the upcoming 60-day legislative session in 2026.