As the 2025 legislative session begins, the Kentucky Chamber Center for Policy and Research has released A Guide to Kentucky Tax Reform, which details recent state tax reform efforts and offers recommendations for Kentucky’s continued progress.
“Tax reform is a journey, not a destination. As economic conditions change, as Kentuckians’ preferences change, and as other state tax codes change, Kentucky policymakers need to remain focused on ensuring a competitive tax structure in the Commonwealth to support sustainable, long-term economic growth. This new report can serve as an instructive guide to policymakers as they continue this journey and pursue the important work of pro-growth tax reform,” the report says.
The path Kentucky has taken to implement pro-growth reform legislation from 2018 through 2023 is laid out, along with survey data from last year demonstrating that Kentuckians strongly prefer a tax system with low or no taxes on individual income.
The report is intended to help policymakers and advocates understand the important reforms Kentucky has already implemented to improve the competitiveness of its tax code and to outline next steps.
Key Achievements of Tax Reform
A Guide to Kentucky Tax Reform highlights how Kentucky’s tax reform journey began with the 2018 and 2019 legislative sessions, which introduced a flat 5% income tax rate, modernized corporate tax structures, and expanded the sales tax base. These foundational changes improved Kentucky’s tax competitiveness and set the stage for further reforms.
House Bill 8, passed during the 2022 legislative session, initiated a phased reduction of Kentucky’s individual income tax. This pro-growth approach has reduced the income tax rate from 5% to 4% over the past two years. After meeting the revenue triggers in 2024, the Kentucky General Assembly is expected to vote to further reduce the individual income tax rate to 3.5% during the 2025 session, which would take effect in 2026.
Kentucky has maintained stable revenues since these reforms took place, the report shows, and during this time, the General Assembly has also made historic investments in infrastructure, education, and health care.
How Kentucky Compares to Other States
Though Kentucky has made significant progress through tax reform, states across the nation are also modernizing their tax codes. Between 2021 and 2023, 25 states reduced individual income tax rates, with several of Kentucky’s neighbors, such as Indiana, Missouri, and North Carolina, implementing significant reductions.
The report says Kentucky’s recent reforms have positioned it as a leader, but attracting business investments and talent requires continued momentum.
For example, states with low- or no-income taxes, such as Tennessee and Florida, have experienced higher rates of in-migration and economic expansion. Also, while Kentucky has made strides, states like Tennessee and Indiana rank higher in overall economic performance and tax competitiveness, underscoring the importance of further modernization.
To stay competitive with other states, the report demonstrates the need to focus on individual consumption and spending rather than production and individual income.
Recommendations for Future Progress
“The state should continue implementing reforms carefully and methodically and should embrace its recent history of continuous improvement and forward progress. This will help ensure Kentucky remains economically competitive, as other states also work to modernize their tax codes and optimize for their own growth,” the report says.
The report calls for policymakers to continue advancing tax reform by:
- Making improvements to House Bill 8’s reduction conditions
- Reforming the Limited Liability Entity Tax
- Improving the state’s treatment of business investments
- Removing business purchases from the state sales tax base
- Ensuring a competitive corporate income tax rate
Read the full report, A Guide to Kentucky Tax Reform, https://www.kychamber.com/research.
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