The Kentucky Senate returned to Frankfort on Tuesday and gave final passage to a bill lowering Kentucky’s individual income tax rate next year, making it the first legislation they will send to the governor for his signature in the 2025 session.
If signed by Gov. Andy Beshear — who previously indicated he would — House Bill 1 will decrease the state individual income tax rate from 4% to 3.5% beginning in the 2026 calendar year. A fiscal note for the bill projects it will decrease state revenue by $359 million in the first half of 2026, and then $718 million annually going forward.
The Senate passed HB 1 by a bipartisan vote of 34 to 3. Two members of the Democratic minority expressed concerns about the long-term implication of the tax cut, but most voted yes.
Leadership of the Republican supermajority indicated last year that passing the tax cut would be their first priority in 2025, following through to do so on just the fifth day of the session, the minimum allowable.
The tax cut of HB 1 is made possible by the state hitting specific budget triggers last year. A landmark bill passed by the Republican supermajority in 2022 created a mechanism to incrementally cut the income tax rate by half a percentage point each year until it is eliminated, so long as the state’s revenue, spending and budget reserve trust fund reach certain levels.
GOP Sen. Chris McDaniel of Ryland Heights said this new round of tax cuts is a sign that Kentuckians are benefiting from the fiscal conservatism of the Republican supermajority.
“To those who would criticize this General Assembly, I say: You do not know what you're talking about,” McDaniel said.
Republicans say the objective of the tax cuts is to increase the population of Kentucky, arguing it would lure more people and employers to locate and remain there. They often cite neighboring Tennessee as their model, which has no individual income tax and whose population has increased substantially compared to Kentucky.
One of the Democrats to vote against HB 1 was Sen. Cassie Chambers Armstrong of Louisville. She said it was not fiscally wise to cut taxes ahead of economic uncertainty for the state, citing the potential negative impact of President Donald Trump’s new tariffs, the expected retaliatory tariffs on Kentucky’s bourbon industry and possible loss of federal funds with the new administration.
Sen. Karen Berg, another Louisville Democrat, added there is uncertainty if the new electric vehicle battery plants set to start production soon in Kentucky will be in jeopardy under Trump, who has criticized current tax incentives and subsidies for the EV industry.
“We are putting way too many apples in a basket that we can't get a hold of if we need,” Berg said.
Critics of Kentucky’s tax trigger system have said it creates permanent tax cuts in the face of a projected decline in revenue over the near term — even before the Trump administration’s recent action — as the temporary surpluses created by the large federal stimulus and pandemic-spurred global inflation in recent years will soon run dry and morph into deficits.
However, most Democratic senators voted for the bill, siding with the wishes of Beshear. The Democratic governor already signaled last year that he will sign the bill if it is sent to his desk, saying Kentuckians need tax relief in the current economy.
Republican Sen. Gex Williams of Verona withdrew his floor amendment to the bill that would have sped up the rate of tax cuts, mandating the rate be cut by a full percentage point annually until it is eliminated by 2030.
GOP leadership in both chambers have indicated that despite the state hitting the budget triggers for a tax cut last year, Kentucky’s economic forecast shows the chances of hitting triggers in the coming years is very low, unless other major structural changes are made to the budget.
Williams said he received “a commitment” that the Senate will consider speeding up the timeline of tax cuts in the near future.
“I am looking forward to this next session, that we will be able to strive for a greater than one half percent cut,” Williams said, adding that this would make Kentucky more attractive for employers and employees.
State government and politics reporting is supported in part by the Corporation for Public Broadcasting.
