The Kentucky Capitol in Frankfort on Feb. 27, 2024. (Kentucky Lantern photo by Arden Barnes)
Kentucky lawmakers are poised to repeat a policy misstep that history and economic theory warn against: cutting taxes during a period of expected revenue decline.
As the saying goes, “when you’re in a hole, stop digging.”
The proposed reduction of the state’s individual income tax rate from 4% to 3.5% comes despite forecasts showing a $213 million drop in revenue for fiscal year 2025. This decision reflects not fiscal prudence but a misplaced reliance on the Laffer Curve’s oversimplified promise that cutting taxes can spur sufficient economic growth to offset lost revenue.
The Laffer Curve, popularized during the Reagan era, proposes that there exists a tax rate “sweet spot” where revenue is maximized. However, the curve’s real-world application is complex and context-dependent. Kentucky’s current tax rate is far from the punitive levels where cuts might theoretically boost revenue. Instead, we are beginning to see the consequences of an overly aggressive tax-cutting agenda: declining revenue, strained public services and increased financial instability.
The Reagan administration offers a cautionary tale. When President Ronald Reagan implemented significant tax cuts in 1981, they were meant to stimulate economic growth and, by extension, government revenue. However, the promised surge in revenue did not materialize, and deficits ballooned. Facing fiscal reality, Reagan signed subsequent tax increases — including the Tax Equity and Fiscal Responsibility Act of 1982 — to stabilize the budget. These adjustments demonstrated that unchecked tax cuts can lead to severe financial strain, necessitating policy reversals to avoid long-term harm.
This reality undermines the argument that reducing income tax will let “Kentuckians retain more of their hard-earned income” without significant trade-offs. The trade-offs are clear enough. Revenue from Kentucky’s individual income tax — the state’s most stable and productive source of funds — has already declined. Meanwhile, lawmakers are relying on volatile corporate taxes and modest increases in sales tax revenue to offset these losses. This is unsustainable.
Also, proponents of these cuts often ignore the broader impacts of reduced revenue on essential public services. As Jason Bailey of the Kentucky Center for Economic Policy aptly noted recently in the Kentucky Lantern, slashing income taxes disproportionately benefits affluent individuals while underfunding education, health care, infrastructure and public worker benefits— all critical investments for long-term economic growth and equity. Unlike neighboring states such as Tennessee, which boast more diverse economies capable of generating substantial revenue from alternative sources, Kentucky’s economy lacks the breadth to offset the loss of income tax revenue. This makes our reliance on stable and productive tax streams even more crucial.
Supporters of further cuts point to budgetary buffers and guardrails designed to absorb revenue fluctuations. However, the 2022 legislation establishing these benchmarks has been manipulated, excluding billions of dollars in one-time spending from fiscal calculations. This sleight of hand creates the illusion of fiscal readiness while kicking the can down the road on inevitable budget shortfalls.
Rather than pursuing ideological tax cuts, Kentucky should prioritize long-term fiscal health and economic competitiveness. Investments in education, health care and infrastructure are proven drivers of economic growth, yielding benefits far greater than those promised by marginal reductions in tax rates. Instead of eroding the tax base, lawmakers should focus on reforms that equitably distribute tax burdens and ensure stable revenue streams.
The push to reduce Kentucky’s income tax rate further exemplifies a fundamental fallacy: the belief that revenue declines can be reversed simply by shrinking the government’s share of economic output. History, including the Reagan administration’s experience, and economic evidence show that tax cuts without corresponding and significant economic expansion or often seemingly draconian expenditure cuts lead to budgetary constraints, diminished public services and widening inequality.
Kentuckians deserve a government that prioritizes fiscal responsibility over ideological taxes but in strengthening the foundational services that support our communities and future growth.
Cutting the income tax to 3.5% amid declining revenue is not just shortsighted; it could prove reckless.
This session, the General Assembly should pivot from pursuing ill-advised tax cuts to addressing the pressing needs of the commonwealth’s constituents. Kentucky’s fiscal future — and the well-being of its citizens — depends on it.