By Tom Loftus
Kentucky Lantern
State government general revenues will fall $305 million short of hitting budgeted expectations in the fiscal year that began July 1, according to a forecast made Tuesday by the group of economists charged with making state government revenue forecasts.
During a nearly four-hour meeting at the Capitol Annex, the Consensus Forecasting Group agreed on a new projection. The adjustment reduces by about 2% projected annual revenue of more than $15 billion in the state’s 2025-26 budget.
Kentucky’s budget situation is such that a $305 million shortfall presents no cause for alarming spending cuts. (The state’s so-called “rainy day” fund which exists to cover revenue downturns, is expected to have a balance of about $3.7 billion at the end of this fiscal year.)
Bruce Johnson, chairman of the Consensus Forecasting Group and a professor of economics emeritus at Centre College, said after yesterday’s meeting that the new downward revision “is not going to change the course of Kentucky state government. … As for any adjustments that have to be made, I’ll leave that to the elected officials to comment on.”
It was Gov. Andy Beshear who asked for the revised forecast two weeks ago when he warned of a possible shortfall. At the time Beshear said he was concerned that “uncertainty surrounding federal tariffs” would affect the economy and state revenues. He also cited the General Assembly’s decision early this year to cut the state income tax rate from 4% to 3.5% effective Jan. 1, 2026.
That was the latest in a series of half-percentage point income tax rate cuts lawmakers have approved since 2022.
Beshear’s office issued a statement Tuesday after the forecast was revised. “Steps will be taken in the coming weeks to address the shortfall under the Budget Reduction Plan, without compromising services to the people of Kentucky; however, the upcoming budget will be significantly more difficult than in the last several years,” the statement said.
Officials of Beshear’s budget office told the forecasting group they were concerned that revenues from the sales and income taxes fell far below expectations last fiscal year. A year-end shortage was avoided only because of a windfall in one-time revenue from major business taxes.
Members of the nine-member forecast group agreed the trend justified a downward revision for revenue and discussed three scenarios, one pessimistic, one optimistic and an in-between “control” scenario that projected the $305 million shortfall.
“At this stage we felt justified going with the control forecast,” Johnson said. Johnson and other members said the lagging sales and income tax receipts in the last fiscal year as well as uncertainty over trade and tariffs were reasons for the downward revision.
“But it’s important to remember that we’ll be coming back in December to revise the forecast again. … We’ll have several more months of actual receipts in hand by then. We’ll have more clarity then,” Johnson said.
At its December meeting, the group will not only revisit the current year estimate, but also project revenue for the 2026-28 budget to be considered by the 2026 General Assembly.
The state’s General Fund collects money from most revenue sources (sales and income taxes, business taxes, property taxes, the lottery, etc.) and that money is appropriated for most state programs such as education, public health, public safety, the courts, the legislature and most major state programs.
The other major state fund is the Road Fund, which collects revenue from the gasoline tax, the sales tax on vehicles, drivers’ and vehicle licenses, and other transportation taxes to pay for road construction and maintenance and other transportation programs.
Also on Tuesday, the forecasting group lowered its forecast for Road Fund revenue for this fiscal year by $82 million — from $1,894 billion to $1,812 billion.
Tom Loftus is a native of Cincinnati and a graduate of The Ohio State University. His long career in Kentucky journalism includes four years as Frankfort bureau chief for The Kentucky Post and 32 years as Frankfort bureau chief for The Courier Journal. He is a member of the Kentucky Journalism Hall of Fame and a freelance reporter for the Kentucky Lantern, a part of States Newsrooms, the natiln’s largest state-focused nonprofit news organization. The story is reprinted here under Creative Commons license.