Kentucky revises revenue projections downward for fiscal 2026

Kentucky’s general fund revenues are down this calendar year and the legislature’s recently revised official estimate now projects a 2.3% decline in revenues in the current fiscal year.

Last week the state’s official predicting body, the Consensus Forecasting Group, approved a preliminary projection of a 2.3% decline in revenues for fiscal 2026, which runs from July 1 to next June 30. 

Lucy Dadayan, principal research associate at the Urban-Brookings Tax Policy Center of The Urban Institute, said general fund revenues were down 0.6% in January to August compared to the same months last year. 

If general fund revenues decline this fiscal year, it will be the first fiscal year decline since fiscal 2010.

“With a very healthy rainy-day fund, a tax collection target miss identified early, and more than half the fiscal year remaining, we’ll watch to see what actions Kentucky will take to address this shortfall,” said Geoffrey Buswick, managing director at S&P Global Ratings.

“It’s important to note that what we’re seeing in Kentucky is being seen elsewhere in the country,” he said.

“We are expecting slowing revenue growth for the state sector as a whole due to slower global macroeconomic trends and the impact that federal policy, or federal policy uncertainty, has on state economies and revenue,” said Denise Rappmund, vice president and senior analyst at Moody’s Ratings. “Therefore, the state’s projections of modestly contracting revenue would be in line with expectations.” 

Rappmund said given the Consensus Forecasting Group’s forecast, the government will need to reduce expenditures by about 1% to maintain structural balance. “Kentucky has ample budgetary flexibility and reserves to manage this expectation.” 

The most recent group projections are bad news in an environment where inflation is rising and President Donald Trump’s One Big Beautiful Bill “shifts huge new costs to the Kentucky state budget,” wrote Jason Bailey, executive director of the Kentucky Center for Economic Policy on the X site. 

Referring to a recent state law that triggers lowered state individual income tax rates under certain conditions, Bailey said, “It was always a bad bet to enact large, permanent cuts to Kentucky’s largest revenue source – the individual income tax – based on temporary good times caused by federal COVID stimulus. Now the fallout from that choice – and the federal policies on tariffs, immigration and budget cuts that are weakening the economy – is starting to appear.”

The state’s individual income tax collections were 4.1% below projections and the sales and use tax collection were 4.3% below projections in fiscal 2025, Greg Harkenrider, deputy executive director of the Office of State Budget, told the CFG. The decline of individual income taxes in fiscal 2025 by 8.4% from fiscal 2024 levels was the biggest decline in these sorts of tax revenues in 10 years. 

Compensating for the disappointing individual and sales and use tax receipts in fiscal 2025, the state’s two corporate taxes came in $507 million above the official projection, Harkenrider said. However, the state believes about $400 million of the $507 million should be considered non-recurring, meaning the government doesn’t expect it in this or future fiscal years. 

Kentucky Budget Director John Hicks asked the CFG to do a new forecast for fiscal 2026 partly because of the shrinking individual and sales and use tax revenues and the non-recurring nature of the corporate tax revenues, Harkenrider told the CFG members. This led to last week’s meeting and new forecast.

In July and August general fund receipts were down 3.7% from receipts in the same months last year, Harkenrider said. 

Harkenrider and his staff offered three possible models for general fund revenues in fiscal years 2026 to 2028. For fiscal 2026 the pessimistic model projects a 2.7% decline, a control model projects a 2.3% decline and the optimistic model a 1.8% decline. 

“If I had to pick among the three choices you’ve given me, I’d pick the pessimistic because it’s the closest to the real data we already have [for July and August],” said CFG board member Chris Bollinger. 

Later in the meeting Bollinger agreed to vote for the control forecast with the rest of the group. 

While July and August’s general fund receipts were down 3.7% from the previous year, the state’s two largest sources of taxes, individual income and sales taxes, were up in the months, Harkenrider said. The months’ take declined because of an 80.5% decline in major business tax receipts in July and this was due to the large, non-recurring sums picked up in July 2024, he said. 

August revenues were “very strong,” Kentucky Senate President Robert Stivers told The Bond Buyer, referring to the 7.7% increase from a year earlier. While revenues were down in July and August together, he said two months don’t make a trend. 

The CFG’s prediction of a 2.3% decline in fiscal year revenues is just preliminary, Stivers said. 

Stivers said the 0.6% decline in the first eight months of the fiscal year is more predictive but not concerning. The state has more than enough surplus to address any shortfalls in revenues this year and, if need be, the following year, he said. In the out years, the CFG says the state’s coffers should grow, he said. 

Last week the group approved predictions of 2.3% annual revenue increases in both fiscal 2027 and fiscal 2028. 

The group will meet again in December, when it will have the option to revise last week’s predictions of general fund revenues. 

Kentucky’s issuer default rating is Aa2 from Moody’s Ratings, A-plus from S&P Global Ratings and AA from Fitch Ratings. The state doesn’t issue any general obligation debt. Its appropriation-backed bonds are rated Aa3 by Moody’s, A by S&P and AA-minus by Fitch. All ratings have stable outlooks.

In June, Moody’s cited over a decade of strengthened governance with commitments to structural balance and higher reserves in Kentucky’s fiscal 2024-2026 biennial budget. The state benefits from growth in key industries. It has followed a “strict adherence to strong pension funding over the last decade.”

On the other hand, the credit is harmed by the uncertainty of federal policies that could negatively impact the state, including tariffs, loss of federal grants connected to clean energy, disaster aid, Medicaid and others, Moody’s said.

The state has low educational attainment and income levels and a comparatively low labor force participation, Moody’s said.

Kentucky has high liabilities and fixed costs relative to own-source income. The state’s long-term liabilities as a percent of own-source revenue is 223.7%, compared to a state median of 99.4%.  Adjusted fixed-costs as a percent of own-source revenue is 13.3%, compared to the state median of 5.2%. 

The state’s real gross domestic product was up about 16% in 2024 from 2014, less than the roughly 27% for the United States. 

Kentucky imports a greater share of its GDP than any other in the country, Moody’s said. It is also a top exporter among states. These facts make it more vulnerable to higher tariffs.

Moody’s said the state’s largest budget exposure to Washington, D.C., is its reliance on federal funding to pay for the Medicaid program, with the feds providing over 75% of the funds.