Kentucky Cuts Income Tax Rate

Analysis of lowering Kentucky's 4% income tax rate to 3.5%.

On February 6, Governor Andy Beshear signed House Bill 1, which reduces Kentucky's flat income tax from a rate of 4% to 3.5% starting in 2026. The bill previously passed the Kentucky House of Representatives with a vote of 90–7 and the Senate with a 34–3 vote.

We at PolicyEngine have updated our model to reflect these changes and analyzed their effects on the state of Kentucky and its residents.

Key results for 2026:

• Reduces state revenues by $684 million

• Benefits 73% of Kentucky residents

• Lowers the state's Supplemental Poverty Measure by 1.3%

• Increases the Gini index of income inequality by 0.14%

Use PolicyEngine to view the full results or calculate the effect on your household.

To understand the extent of this reform, it is important to note that higher-income households receive larger tax savings because they have more taxable income and therefore higher initial tax liability. For example, a childless adult earning $20,000 in Kentucky gains $58 from the 0.5pp rate reduction, while they would gain $483 if they earned $100,000, or $1,664 if they earned $500,000.

Table 1: Change in Net Income by Household Income for a Single Adult

Below, Figure 1 displays the reduction in Kentucky income tax for a childless adult between $0 and $500,000 of household earnings. Since Kentucky's Family Size Credit fully offsets state tax liability for those below the federal poverty line, childless adults with income below $16,040 in 2026 will not benefit from the tax cut.¹

Figure 1: Change in Kentucky Income Tax for a Single Adult by Household Income

Using PolicyEngine static modeling, the individual income tax rate reduction enacted in Kentucky will cost the state $684 million for tax year 2026. The measure would also increase federal revenues by $48 million, as residents would have less state income tax to take as an itemized deduction. On net, the tax cut would increase residents' net income by $636 million, without considering behavioral responses.

Figure 2: Budgetary Impact of Kentucky's Income Tax Cut

73% of Kentuckians will see an increase in their net income, including 99% of those in the top income decile and 6% of those in the bottom decile.

Figure 3: Winners of Kentucky's Income Tax Cut by Decile

The tax cut will provide an average benefit of $335 per household, ranging from $5 in the bottom income decile to $1,470 in the top decile.

Figure 4: Income Distribution of Kentucky's Income Tax Cut by Decile

The tax changes are projected to reduce Kentucky's poverty rate by 1.3%, applying the Supplemental Poverty Measure, while leaving deep poverty unchanged. The income tax reduction will also increase the state's Gini index of income inequality by 0.14%.

The 0.5pp rate reduction of Kentucky's income tax will lower state revenues by $684 million in 2026, while reducing poverty by 1.3% and increasing income inequality by 0.14%. The reform reduces tax liability for households across all income deciles, with higher-income households receiving larger benefits on both an absolute and relative basis.

As policymakers evaluate reforms such as these, analytical tools like PolicyEngine offer critical insights into the impacts on diverse household compositions and the broader economy.

We invite you to explore our additional analyses and use PolicyEngine to calculate your own tax benefits or design custom policy reforms.

david trimmer
Policy Research Fellow at PolicyEngine

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