Kentucky lawmakers return to Frankfort on Jan. 6 to kick off the 2026 legislative session. Their top responsibility is crafting and passing a two-year state budget that spends roughly $15 billion annually from the General Fund.
Whereas the past two budget sessions of the Kentucky General Assembly came amid huge surpluses — in large part spurred by a surge of pandemic era federal spending — lawmakers are expected to face a more challenging environment when mapping the state’s fiscal course over the next two years.
The federal spigot has not only dried up, but new legislation passed by Congress this past summer will reduce spending on some federal programs in future years, with Kentucky potentially having to pick up an annual $180 million bill for food assistance.
After surpluses approaching or exceeding $1 billion in recent years, Kentucky is also forecast to have its first budget shortfall in nearly a decade for the current fiscal year, which ends this summer.
Lawmakers in Republicans’ dominant supermajority have used surpluses in recent years to build the state’s budget reserve trust fund to nearly $4 billion — while also spending $2.7 billion from that same fund in the 2024 budget session on infrastructure projects and public pension payments.
Republicans appear less likely to make such “rainy day fund” spending in the upcoming budget session amid a $156 million projected shortfall — though Democratic Gov. Andy Beshear and other stakeholders have highlighted the need to make significant new investments in education and child care.
There is also the question of whether the Republican supermajority will push forward with an income tax cut, despite the fact that Kentucky slightly missed the budget conditions this past summer to trigger a .5 percentage point cut to the tax rate in 2027.
While Senate GOP leaders have voiced caution about passing a tax cut this session, House GOP leaders have expressed an interest in doing so — a move estimated to reduce state tax revenue annually by another $718 million.
Here’s a closer look at the financial landscape in Frankfort as lawmakers budget for the next two years in the 2026 session.
Republicans consider tax cuts, despite missing budget trigger
At a legislative preview conference hosted by the Kentucky Chamber of Commerce in November, Republican House Speaker David Osborne of Prospect said there is a robust debate of "disparate ideas” among the supermajority about how to address the “unique challenges” of the upcoming budget session.
“We will face some questions this budget cycle that we haven't in the past,” Osborne said. “And I don't think it's going to be a contentious battle, I just think it's going to be a real interesting clash of ideas and opinions.”
One of those clashes has already made itself apparent, as Republican leaders in the House and Senate have signaled differences of opinion on whether lawmakers should pass a tax cut this session, or significantly revamp its tax cut trigger mechanism to make cuts easier.
Republicans created the complicated tax cut mechanism in 2022, aimed at incrementally lowering Kentucky’s individual income tax rate by a half point until it is eventually eliminated. The rate is lowered each year so long as General Fund spending, tax revenue and the state budget reserve trust fund hit certain levels — though Kentucky has missed the triggers two out of the past three years, including narrowly this past summer.
Despite tax revenue falling just $7 million short of hitting the trigger, GOP Rep. Jason Nemes, the House majority whip from Middletown, said at the same chamber event that lawmakers should pass the tax cut anyway, lowering the rate from 3.5% to 3% for the 2027 calendar year.
“I think we did hit the triggers in Kentucky, and even if we didn't — but we did that — we should, we need to reduce the taxes anyway,” Nemes said.
Osborne didn’t outright call for passing the same tax cut, but acknowledged there is a serious debate over whether to do so in their House caucus. He also noted that the legislature altered the trigger mechanism in 2025 to allow smaller incremental cuts — which would have been triggered this past summer, but do not go into effect until 2026 — and said “there’s a conversation about, should we just go ahead and accelerate that portion of it?”
The state budget bill and any potential tax revenue bill must originate in the House, but Republican leaders in the opposite chamber have so far been cold to that idea.
GOP Sen. Chris McDaniel, the Senate budget committee chairman from Ryland Heights, was on the same panel as Nemes and expressed a different opinion, saying the state did miss the tax cut triggers and should stay the course. Earlier in the summer, he also discounted the need for significantly altering the trigger mechanism again to make hitting them easier.
At a GOP Senate caucus retreat in December, Senate President Robert Stivers of Manchester agreed, saying businesses want consistent policy.
“We just want to keep following our policy,” Stivers said. “If we hit (the tax cut triggers), we hit it. If we don't, we don't. But we follow the policy we set.”
Beyond income tax cuts, Osborne said his caucus is also looking at other types of potential tax reform, including cutting or eliminating inheritance taxes and limited liability entity taxes on businesses.
Rep. Savannah Maddox of Dry Ridge, a leader of the fiscal hawk wing of the GOP caucus, noted that the House is not just seriously considering a tax cut or further altering of the trigger mechanism, but “reducing or removing property taxes.” Much of property tax revenue goes to local governments, but Maddox said passing such reform may open a path for a “local option” sales tax reform that cities and counties have advocated for over the past decade, which would allow them to modernize their tax codes.
Even if Republicans don’t cut the income tax rate this year, their eagerness to hit the budget triggers in future years is likely to have an effect on spending.
In past sessions, the GOP supermajority appropriated significantly less spending than what was projected in tax revenues — which they credit for creating budget surpluses that have grown the rainy day fund to a record amount. Keeping spending low also increases the odds of hitting the most difficult tax cut trigger: ensuring that revenue in a fiscal year would have exceeded spending, even if the tax rate had been one percentage point lower.
Critics of the GOP push for income tax cuts in recent years — like progressive think tank Kentucky Center for Economic Policy — say they are depleting state resources needed to invest in infrastructure and education. The group says the effect of tax cuts will become more glaring now that federal spending is no longer propping up budget surpluses.
New projections estimate $156 million shortfall
After a decade of state tax revenue consistently exceeding what was forecast in the budgets — sometimes by as much as $1 billion in recent years — economists with the Consensus Forecast Group expect a shortfall for the first time since 2017 for the current fiscal year.
While the shortfall is for the current fiscal year and won’t necessarily affect the following two years of the biennium budget, it is a sign that lawmakers may no longer be able to assume surpluses going forward.
After the first two months of the current fiscal year showed a drop in revenue, Beshear called the group together for an early meeting in September, where they forecast a $305 million shortfall by this summer. At the time, Beshear blamed the shortfall on the economic turmoil of Trump administration tariffs, as well as previously enacted income tax cuts.
However, revenue has improved since then, with the economists in December projecting a smaller $156 million shortfall. They also forecast the state’s road fund for transportation projects to have a $50 million shortfall.
Beshear said the shortfall can mostly be covered by not filling budgeted open positions, referred to as vacancy credits. He ordered several executive agencies to cut 3% of their budgets. He said the deficit, which amounts to just 1% of General Fund appropriations, will not affect funding for essential services like Medicaid, public safety or K-12 education.
Before the state economists revised the size of the shortfall down in December, GOP Senate President Stivers said he doubted there would be any significant shortfall, pointing to a year-over-year anomaly in July. He added that because the budget reserve trust fund has grown to $3.7 billion, they would easily be able to plug in a relatively small hole in their roughly $15 billion annual budget.
“If there is a need to cover it, and the governor's office won't deal with it, with some minor adjustments, we have the money to cover it,” Stivers said.
Big shoes to fill after federal cuts to food assistance
As lawmakers weigh income tax cuts and potential revenue shortfalls, they must also consider federal cuts going into effect over the next decade. The Trump-backed One Big Beautiful Bill, which extended and expanded tax cuts, also made big reductions in food assistance benefits and Medicaid.
The cost shifting of the Supplemental Nutritional Assistance Program, formerly called food stamps, will hit the state first. Historically, states have shared the administrative cost of the program with the federal government equally. Now, states will take on a greater burden, paying 75% of those expenses, which could be more than $50 million extra each year in Kentucky. The giant tax and spending bill also defunded SNAP Ed, a nutrition education program and expanded work requirements to parents with older children and older Kentuckians.
Starting in October 2027, some states will also be partially responsible for paying part of the payments if their SNAP error rate, which is based on how often states accidentally make under- or overpayments, exceeds 6%. The error rates vary from year to year, and last fiscal year Kentucky’s rate stood just over 9% — while under the national average, it would mean the state would have to cover a portion of the benefit that helps feed one in eight Kentuckians.
McDaniel said he hopes the state can reduce its error rate before that deadline and avoid taking that hit, which he estimated to be about $130 million annually. There’s little time to achieve that goal however — the 2028 cut will be decided by this fiscal year’s error rate, or the one from last year.
“Ideally, the error rate can be brought down over the next several months, and we won't have to eat that,” McDaniel said. “There is the distinct possibility of $180 million a year hit to the budget between administration and benefits.”
A much bigger funding crater is coming down the line in Medicaid spending. Over the next decade, healthy policy nonprofit KFF estimates Kentucky will see a $22 billion reduction. Lawmakers have so far seemed most interested in reforming the state’s Medicaid program and reducing existing costs, which have ballooned in recent years.
Beshear told KPR it will be impossible to fill in for the hole left by federal cuts, like the changes to the Medicaid program or attempt to end the Building Resilient Infrastructure and Communities grant program.
“No state can fill in for the amount of damage that the federal government is doing right now and will do in the future,” Beshear said.
McDaniel also warned that the state legislature has no interest in paying for cut federal programs, nor the ability to do so.
“If you have a federal program currently that you think that the state is going to backfill, rethink your strategy,” McDaniel said. “The state is not going to backfill federal programs that get changed. It's just not going to happen. We simply do not have the bandwidth or the financial wherewithal to do so.”
Beshear wants more education spending on pre-K
Beshear is again making big budget asks of the GOP-controlled state legislature. It will be his last two-year budget session as governor, which means it’s likely also his last opportunity to achieve many of the big-ticket items he ran on, including universal pre-K and across-the-board raises for public school teachers.
“One of the biggest steps we've got to take if we want to compete with 18 other states that are telling businesses that they have pre-K for four year olds, which frees up more of the workforce, is to get it passed here,” Beshear said.
He has rallied support from the Kentucky Education Association, local chambers of commerce and local officials to support his plan for universal pre-K, which he says would be a “game-changing investment” for the state. Unfortunately for Beshear, GOP leadership has shown no interest in his plan, which would incur significant annual costs. In his 2024 budget proposal, Beshear recommended $172 million each year to serve 10,000 Kentucky four-year-olds.
Senate President Stivers, who has long stood in opposition to universal pre-K, said county judges and chambers of commerce have been getting “a lot of phone calls” from those wanting them to get on board with Beshear’s plan.
“I'm not gonna say who made those calls, but you all can figure out who made the calls. Because we got the calls,” Stivers said. “We're going to set policy based on what we think is good policy, not political arm twisting.”
Beshear argues the plan could be paid for via sports wagering revenues, which state law requires to go primarily toward paying down the state’s pension debt.
GOP House Floor Leader Steven Rudy, of Paducah, recently said the General Assembly’s priorities will be paying down debt, investing where possible and saving — not starting new programs.
“That is what we will be focused on: investing in infrastructure and other necessary things to move Kentucky forward generationally, and not necessarily just creating new government programs,” Rudy said. “We don't feel [like] adding to long term problems. We've got a razor focus on what is actually the function of state government.”
