The Kentucky General Assembly will create a new two-year budget in 2026 in the face of declining state revenues and substantial new costs passed down from Congress. Large recent state income tax cuts and a slowing national economy are already causing a $305 million budget shortfall this year. And HR 1, the federal megabill passed this summer, shifts major costs for Medicaid and SNAP food assistance to states. This challenging context threatens much-needed investment in Kentucky’s already-underfunded schools, hospitals, infrastructure and human services.
At the same time, the state’s wealthiest people are doing better than ever. Their incomes and investment portfolios are soaring while they’re being showered with enormous federal and state tax cuts. In 2026, Kentucky’s richest 5% will receive $3.4 billion from tax cuts enacted over the last decade. That’s revenue no longer available to meet people’s needs. Kentucky workers, meanwhile, are facing stagnant and inadequate wages and a growing cost of living crisis that will get worse if state budget cuts are enacted.
There is a commonsense way to respond to this budding crisis. Kentucky could pass a windfall tax on the wealthy that redirects revenue lost through tax cuts favoring those at the top. A windfall tax is a practical and fair way for the General Assembly to protect critical public needs and create a path to a more prosperous Kentucky for all.
Two-thirds of state and federal tax cuts have gone to the wealthiest 20%
Kentucky’s legislature began enacting major tax changes in 2018. That year, the General Assembly shifted from a graduated income tax with rates of 2% to 6%, which had been in effect for over 80 years, to a flat tax of 5%. Lawmakers also applied the sales tax to a variety of new services. On average, the bottom 95% of Kentuckians paid more in taxes from these changes, while only the top 5% by income received a tax break.
Then in 2022, the legislature passed legislation dropping the rate to 4.5% and creating a trigger mechanism that provides recommendations each year as to whether to reduce the rate further. In the last few years, that led to a decline in the income tax rate to 4% in 2024 and then 3.5% on Jan. 1, 2026. The top rate will have fallen a tremendous 42% in total as of next year.
At the same time, in 2017 Congress passed the Tax Cuts and Jobs Act that gave large tax cuts that were skewed to high-income people and corporations. Then in summer 2025 Congress passed HR 1, the One Big Beautiful Bill Act (OBBBA), that extended and expanded those cuts.
Nearly 10 years after these state and federal tax cuts began, we have a clear picture of the total impact and the distribution of who benefits. As shown in the graph below, two-thirds of these tax cuts go to the richest 20% of Kentuckians by income according to analysis by the Institute on Taxation and Economic Policy. The wealthiest 1% alone receive 20% of the cuts, substantially more than the 15% received by the bottom 60% of Kentucky residents combined.
The net effect of these tax reductions is to make Kentucky’s already upside-down state and local tax system even more so. Low- and middle-income Kentuckians pay far more of their income in state and local taxes than the wealthy. That imbalance is driven in large part by the shift to reliance on the state’s 6% sales tax, which takes a higher share of income for those on the bottom than those on the top. After the state income tax cuts of the last few years, the sales tax is now Kentucky’s largest revenue source.
Cost of these tax cuts is huge
Not only are recent tax cuts inequitable; they are also incredibly expensive. In 2026, federal and state tax cuts enacted in the last decade will cost $8.3 billion. That’s over half as large as the entire annual Kentucky General Fund state budget, which totals $15.3 billion.
- Because the tax cuts disproportionately benefit those at the top, the cuts to the highest-earning 20% of Kentuckians equal $5.7 billion. That’s more than the $5 billion the state spends on P-12 education.
- The top 5% receive $3.4 billion annually, more than the $3.1 billion the state spends on Medicaid — which covers 1.5 million kids, seniors, people with disabilities and low-wage workers now at risk of losing health coverage due to HR 1.
- The highest-earning 1% — a group with $1.6 million a year in household income on average — pocket $1.7 billion. That’s more than the $1.3 billion in net tuition revenue paid by all students at Kentucky public universities and community colleges.
At the same time, the incomes and investment portfolios of those at the top are growing rapidly. The Dow is up 43% since 2023, while wage growth is much faster at the top. Nearly half of all consumption in the economy is now spending by the richest 10% of people, whose rising fortunes allow them to buy ever more luxury goods and services.
Working class Americans, on the other hand, are increasingly struggling. Job openings have declined and wage growth for low-wage workers has slowed. Youth and Black unemployment rates are rising, and delinquencies on car loans are going up. Blanket tariffs are also contributing to rising prices and households are increasingly stretched by the cost of housing, insurance and more. And the federal tax cuts in HR 1 are paired with cuts in programs like Medicaid, SNAP and energy that will result in even higher costs for food, health care and electricity and take benefits away from hundreds of thousands of Kentuckians.
A windfall tax on the wealthy can protect vital services and move Kentucky forward
There is a logical way to begin addressing these challenges. Those at the top didn’t need the huge windfall in state and federal tax cuts they received. Those dollars came out of funding for schools, health care and other public services that benefit us all. It makes sense now to ask the wealthy to chip in, prevent harmful cuts to critical needs and pave the way to a more prosperous future for everyone. As demonstrated above, there are substantial resources available from redirecting recent giveaways for the wealthy to pressing public needs.
