Courtesy of Kentucky Lantern
Kentucky tax revenues are likely to slip below budgeted expectations in the new fiscal year, Gov. Andy Beshear said Thursday.
The effects of federal tariffs on the Kentucky economy and a cut in the state income tax that takes effect on Jan.1 are likely to cause the shortfall, Beshear said at his weekly press conference.
The governor said he has asked State Budget Director John Hicks to convene the team of economists that makes official projections of state revenue—the Consensus Forecasting Group—on Sept. 16 to update the revenue forecast for the fiscal year that began July 1.
“I’ve been receiving regular updates on our revenues and our projections for this year, and there is concern there will be a shortfall in total revenue collected,” Beshear said. “Some of this may be due to uncertainty surrounding federal tariffs and the choice we made to cut Kentucky’s income tax rate. … The Consensus Forecasting Group will let us know if we will have a shortfall, and if so, we can begin taking steps to address it.”
It seems unlikely that painful spending cuts would need to be part of any solution to balancing the budget. That’s because the state’s so-called “rainy day” fund has been brimming since record state revenue surpluses of the pandemic era. That fund is expected to have a balance of about $3.7 billion at the end of this fiscal year.
A news release from Beshear’s office later Thursday elaborated on his causes for concern. “Federal tariffs are directly impacting spending and economic activity” while the income tax cut that takes effect in the second half of the year will cost the state $359 million in revenue.
House Speaker David Osborne, a Prospect Republican, said he was somewhat puzzled by Beshear’s comment.
“The Consensus Forecasting Group is already scheduled to deliver an updated economic outlook, and we continue to monitor economic conditions and revenue numbers with our economists. If this is genuinely a concern, why not bring it to us earlier—particularly since the governor’s budget director testified before lawmakers just two weeks ago,” Osborne said in a statement.
“To be frank, we are somewhat skeptical that this is yet another attempt to politicize the budget when we know a responsible, measured approach is far better for Kentucky.”
Will Kentucky cut income taxes again?
Meanwhile, another budget development could affect prospects for the legislature continuing to lower the income tax when it convenes in Januaury.
Kentucky Lantern learned this week that the revenue and budget numbers for the fiscal year that ended June 30 did not meet one of two requirements for the General Assembly to consider another income tax rate cut in 2026 under a 2022 law that sets up a process to incrementally reduce the rate with a goal of eventually eliminating the state income tax.
In 2022 the legislature cut the income tax rate from 5% to 4.5%. It also set up a process for future rate cuts of one half of 1 percentage point—if certain budget conditions indicated the cuts could be done responsibly. Under this process the 2023 General Assembly cut the rate to 4%, and the 2025 General Assembly cut the rate to 3.5% effective Jan. 1, 2026.
The process allows lawmakers to consider a half-point reduction in the income tax rate if two requirements are met at the end of the prior fiscal year:
- The “rainy day” fund balance is at least 10% of what total General Fund receipts were in the fiscal year just ended.
- Revenue in the prior fiscal year would have exceeded General Fund spending even if the income tax rate had been 1 full percentage point lower.
The Office of State Budget Director reported to the legislature last month that its analysis of the year-end numbers showed that the second requirement was not met, said Sen. Chirs McDaniel, a Ryland Heights Republican who chairs the Senate budget committee.
“We missed hitting that second trigger by a about $7.5 million,” McDaniel said. “That’s a very small amount in the context of annual revenues of about $15 billion.”
But McDaniel said that another income tax rate cut during the 2026 legislative session is likely to remain a topic of discussion among the supermajorities of Republicans who control the Kentucky House and Senate.
One question McDaniel asked was whether revenue for last year was slightly depressed because floods and bad weather caused the state to push the income tax filing deadline from April to November.
Jason Bailey, executive director of the progressive Kentucky Center for Economic Policy, said, “The state failing to meet its tax cut trigger this year is a small sigh of relief for every Kentuckian who relies on the success of our schools, hospitals and other vital services. But it comes on top of news of an expected shortfall this fiscal year due to the income tax cuts the legislature has already made and a weakening economy due to unwise federal policies.”
“On top of falling income tax receipts,” Bailey said, “Kentucky must deal with major new cost-shifts coming from the harmful mega-bill that passed Congress this summer. It is time to bring an end to the wrong-headed goal of eliminating the state’s largest revenue source, a policy that—like that new federal law—overwhelmingly benefits the wealthy.”
Kentucky Lantern is part of States Newsroom, the nation’s largest state-focused nonprofit news organization.
