This is two percentage points lower than it was in 2017, when Kentucky had a graduated income tax structure with a top rate of 6 percent. Our current rate is 4.5 percent, but on January 1, 2024, Kentucky’s individual income tax rate will fall to just 4 percent.
Kentucky has met these conditions in the past two legislative sessions, allowing for votes by the General Assembly to reduce income taxes in 20. The plan was designed to gradually and carefully phase out income taxes, similar to plans being pursued in other states like North Carolina. These two benchmarks require the Commonwealth to have a Budget Reserve Trust Fund balance equal to at least 10 percent of state revenues and see state revenues exceed state appropriations by an amount equal to a 1 percentage point reduction in income taxes. According to a new law passed in 2022, when the state meets certain revenue benchmarks, lawmakers may vote to reduce income taxes by 0.5 percentage points.
Last week, the Kentucky Office of State Budget Director (OSBD) released a report showing that the state failed to hit one of two “revenue conditions” to allow for further reductions to Kentucky’s individual income tax. But thanks to action by state policymakers in recent sessions and advocacy by the Kentucky Chamber, Kentucky has made strong progress on tax reform and remains well-positioned to compete for skilled workers and new economic opportunities. A vote to further reduce Kentucky’s individual income tax rate in the 2024 legislative session is unlikely, based on a new state government report released last week.