Kentucky’s legislative interim – the summer and fall months between the conclusion of the prior session and the beginning of the next – offers some breathing room for legislators and advocates alike. Lawmakers cannot file or pass legislation until next January, so while the Frankfort-focused among us may glean insights into future policy priorities from a committee hearing or monitor The Administrative Register to track executive branch rulemaking, Capitol headlines are relatively few and far between this time of year.
One bit of recent news that may have been crowded out by candidate announcements or national headlines is that the Commonwealth, once again, has achieved a budget surplus.
According to the Office of the State Budget Director in its quarterly economic report, the state concluded the 2026 Fiscal Year on July 30 with a $302 million General Fund revenue in excess of the enacted budget estimate. Windfalls of any type are certainly welcome news; this one was particularly desirable because just six months earlier, more pessimistic estimates suggested an actual shortfall was likely – so much so that the executive branch began preparing agencies for cuts.
Now, policymakers enter the 2026-2028 biennium with a consequential carryforward on a $32 billion, two-year spending plan.
The legislature has made a conscious effort to expand the tax base, primarily through a broadened application of the state’s 6% sales tax to include more services, all the while lowering the individual income tax incrementally. This was a big bet on growth, and this methodical approach seems to be bearing fruit: policymakers have lowered the individual income tax 30% over the past four years (from a flat 5% in 2018 down to 3.5%), while consistently achieving budget surpluses.
Those surpluses have enabled consequential capital project investments across the state, including (er, especially) in Louisville. The May edition of this newsletter identified more than $162 million of projects directly impacting this community just from the supplemental funding bill, to say nothing of the biennial budget or state highway plan. That was the second round of such funding in as many budget cycles.
Forecasting is hard, and factors well-beyond the control of Kentucky’s elected officials can generate headwinds or even spur additional growth. It is way too early to predict Round Three, but the strong close out to the most recent fiscal year, combined with a $3 billion budget reserve trust fund (the “rainy day fund”) puts this Commonwealth and the Greater Louisville area on firm footing for the future.