LOUISVILLE, Ky. — Kentucky’s income tax rate will not go down another half percentage point in 2025, after the state failed to meet a condition for further cuts.

What You Need To Know

  • Kentucky has not met one of two conditions to reduce the income tax rate further in 2025

  • Republican lawmakers want to eliminate the tax entirely 

  • The current income tax rate is 4.5%

  • It will drop to 4% next year 

In 2022, after hours of debate, lawmakers passed House Bill 8.

It established incremental reductions in the state’s income tax, based on certain conditions.

“We met the first year and the second year’s metrics to reduce the income tax by a half of a percent,” said Majority Whip Jason Nemes, R-Louisville, on Friday. “It’s a conservative approach to a conservative goal to get [the income tax rate] to zero.”

Because of House Bill 8, the state income tax went down from 5% to 4.5% this year.

It will go down to 4% next year, but remain at 4% in 2025.

A letter dated Aug. 14 from State Budget Director John Hicks shows Kentucky did not meet the condition that state revenues at the end of a fiscal year are the same as or higher than appropriations, plus the cost equivalent of a 1% reduction in the income tax rate.

The letter shows a gap of about $435 million.

Nemes said Republicans anticipated this, and he pointed to emergency expenses like recovery from flooding in eastern Kentucky.

“For the first time, because we have enough money in the rainy day fund, one of the main reasons we didn’t meet the goal this year, over $300 million of the $400 million gap there was because we paid cash for the emergencies this past year,” said Nemes. “Had we not had any emergencies, we would have had that $300 million in there and we could have made some small adjustments to make it.”

Democrats, including Rep. Nima Kulkarni, D-Louisville, say the income tax reduction bill, which also made dozens of additional services subject to the 6% sales tax, shifted the burden from the highest earners to everyday Kentuckians.

“What we are seeing basically is a failure to invest in the services Kentucky needs,” said Kulkarni. “We are talking about worker shortages. We need to be able to pay our teachers more. We need to be able to pay our first responders more and we should anticipate further disasters.”

Republicans expect to see another reduction, down to 3.5% in 2026, Nemes said.

In a news release, the Kentucky Center for Economic Policy said “even small rate cuts are incredibly costly.”

KyPolicy Executive Director Jason Bailey urged lawmakers to stop further cuts and “focus on the education, health and infrastructure investments communities must have in order to thrive.”   

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