Kentucky’s projected budget surplus for the current fiscal year is stronger than initially anticipated, according to the Consensus Forecasting Group.
The budget surplus for Fiscal Year 2023 is expected to grow about 6.4% from the $945 billion surplus in 2022 to $1.4 billion. This comes after Kentucky recorded a surplus of more than $1.1 billion for fiscal year 2021.
The group predicted a strong surplus in 2024 as well, meaning that if the state’s financial outlook holds steady, it will be the fourth largest budget surpluses in the history of the Commonwealth.
The surpluses are expected to bring the state’s rainy day fund up to over $3 billion at the end of fiscal year 2023 and nearly $4 billion at the end of fiscal year 2024. These figures also represent growth rates of 3.4% for the 2023 fiscal year and 1.7% for fiscal year 2024, the Forecasting Group reports.
The increase in the surplus is most likely due to solid revenue trends, increased forecasts in individual income taxes, sales and business taxes, and the economic improvement of households and businesses, according to Executive Cabinet Secretary and State Budget Director John Hicks.
“One area of the economic assumptions highlighted in the CFG’s deliberations is that manufacturing employment in Kentucky will do better than the United States as a whole,” Hicks said. “And that data does not incorporate the manufacturing announcements like the Ford/BlueOval SK battery plants.”
As an independent operator, the 10-member Group includes professors and economists. The group held a meeting Thursday, where they presented evidence to show that the state’s coffers will continue to grow.
Sen. Chris McDaniel (R-Ryland Heights) recently acknowledged that the current surpluses in Kentucky are fleeting, but consensus forecasting predicts the surpluses will last for another three years, he said. He also said the legislature has worked to reign in the state’s long-term spending.
“I think we’ll see stability,” McDaniel said. “These 14% and 10% spikes [in revenue] we saw in some of these numbers is not realistic to sustain in any large measure.”
Not every group sees the surpluses as positive indicators for the state’s economy.
Jason Bailey, the executive director for the Kentucky Center for Economic Policy, recently told LINK nky that the surpluses are due to temporary money flowing into the state via federal stimulus money during the COVID-19 pandemic.
“The revenue surpluses we see today will be a thing of the past,” Bailey said. “At some point, things will return to the historic norm in which Kentucky has very tight budgets and modest revenue growth.”
The state is also using these surpluses to lower the state’s income taxes by increments of a half percentage point per year over the next 10 years.
The first cut is scheduled to take place on Jan. 1, 2023, reducing the income tax from 5% to 4.5%.
The reductions each year will depend on money in the balance reserve trust fund, general fund appropriations, and general fund moneys against the individual income tax expenditure — or, more generally, how the state is doing financially.
The cut in 2023 is due to the positive financial numbers from 2021. The cut in 2024 will be based on the 2022 numbers.
“The way the bill is written, there’s a series of triggers and safeguards that have to be met before the tax would actually decrease,” McDaniel said.
