Kentucky State Decided to Increase the Income Tax Rate for Its Residents

Kentucky, a state known for its low and flat income tax rate, has recently announced a surprising decision to increase the income tax rate for its residents. The new rate will be 5.5%, up from the current 4.5%, and will take effect from January 1, 2025. This is a reversal of the previous plan to phase out the income tax by reducing it to 4% in 2024. What are the reasons behind this change and how will it affect the taxpayers in Kentucky?

Reasons for the Income Tax Increase

The main reason for the income tax increase is the state’s fiscal situation. According to the Kentucky Department of Revenue, the state is facing a budget shortfall of $1.5 billion for the fiscal year 2025-2026. This is due to the impact of the COVID-19 pandemic, which reduced the state’s revenue from sales tax, corporate tax, and other sources. The state also has to deal with the rising costs of health care, education, pensions, and infrastructure.

To address the budget gap, the state legislature passed House Bill 2, which was signed by Governor Andy Beshear on February 15, 2025. The bill includes several revenue-raising measures, such as expanding the sales tax base to include more services, increasing the cigarette tax, and imposing a new tax on vaping products. However, the most significant and controversial measure is the increase of the income tax rate from 4.5% to 5.5%.

The supporters of the bill argue that the income tax increase is necessary to avoid drastic cuts in public services and programs that benefit the citizens of Kentucky. They also claim that the increase will only affect the high-income earners, as the bill provides a new standard deduction of $15,000 for single filers and $30,000 for married filers. This means that anyone with an income below these thresholds will not pay any income tax at all.

The opponents of the bill, however, criticize the income tax increase as a burden on the middle class and the small businesses. They also point out that the increase will make Kentucky less competitive and attractive for investment and job creation, as the state will have one of the highest income tax rates in the region. They also question the effectiveness and fairness of the bill, as it does not address the structural problems of the state’s tax system, such as the lack of progressivity and the reliance on outdated and narrow tax bases.

Effects of the Income Tax Increase

The income tax increase will have different effects on different groups of taxpayers in Kentucky. According to the Kentucky Center for Economic Policy, a nonpartisan think tank, the income tax increase will raise about $800 million in additional revenue for the state in 2025. However, the distribution of the tax burden will be uneven, as the top 20% of income earners will pay 80% of the additional tax, while the bottom 60% will pay only 6%. This means that the average tax increase for the top 1% of income earners will be $8,700, while the average tax increase for the middle 20% will be $140, and the average tax increase for the bottom 20% will be $0.

The income tax increase will also have an impact on the economy of Kentucky. According to the Tax Foundation, a conservative think tank, the income tax increase will lower the state’s ranking on the State Business Tax Climate Index from 18th to 25th. This means that Kentucky will become less attractive for business activity and investment, as it will have a higher tax burden than its neighboring states, such as Tennessee, Indiana, and Ohio. The Tax Foundation estimates that the income tax increase will reduce the state’s GDP by 0.4%, the employment by 0.3%, and the wages by 0.2% in the long run.


The income tax increase in Kentucky is a controversial and consequential decision that will affect the state’s fiscal situation, the taxpayers, and the economy. The state hopes that the income tax increase will help close the budget gap and fund the public services and programs that are essential for the well-being of the citizens. However, the income tax increase will also impose a higher tax burden on the high-income earners and the small businesses, and potentially harm the state’s competitiveness and growth. The income tax increase also raises questions about the need for a comprehensive and balanced tax reform that can address the structural problems of the state’s tax system and ensure its sustainability and fairness.

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