Kentucky policy impacts 2026 income taxes

SOUTH CENTRAL KENTUCKY – According to the Kentucky Center for Economic Policy, the individual income tax is the state’s largest source of revenue.

On January 1, 2026, the legislature lowered the income tax rate to 3.5 percent. This continues a series of cuts that began in 2018, when the rate was 6 percent.

Jason Bailey, the executive director of the Kentucky Center for Economic Policy, says, “Each half-point cut, though, it gets harder. Because you’re starting to get into, you know, the trade-offs. What does it mean for teacher pay? What does it mean for health care access? What does it mean for bridges and roads and water systems that need to be repaired? So it’s a real debate.”

While the outcome of tax cuts can impact necessities in the community funded by the state, taxpayers may not feel the effects for at least a decade.

Bailey says, “You know, a half a point cut is not going to be noticeable for a lot of folks. In fact, we did a poll recently, only 9% of Kentuckians said they were helping them. And my guess is that a lot of people just don’t notice the difference. It’s not large enough. In the context of everything else going on in the world.”

This may be less expensive for Kentuckians.  The state will need to find a way to continue to fund community colleges, Medicaid and infrastructure.

Bailey says, “It is very expensive for the budget. It costs about $718 million to cut the rate, half a point. So lawmakers have made this a priority to continue to cut the income tax. In fact, they put a goal in law of completely eliminating our state income tax. But I think there are a lot of questions about how do you pay for such a thing.”