FRANKFORT, Ky. — The Office of State Budget Director reported today that General Fund receipts for 2023 (FY23) totaled $15.1 billion, exceeding budgeted estimates by $1.4 billion, the largest revenue surplus in history. The final budget surplus amount will be known once the accounting records for expenditures are completed later this month. This will be the third consecutive year with a General Fund budget surplus of over $1 billion. Road Fund revenues totaled $1.75 billion, 4.7 percent over last year, resulting in a $32.3 million revenue surplus.
The General Fund revenues substantially exceeded expectations in putting together the budget for the third year. This revenue report bears out the underlying strength of Kentucky’s economy: more jobs, higher wages and salaries, another year of double-digit growth in sales tax revenues, and continued business profits. The $15.1 billion in revenues also incorporated six months of a 10 percent individual income tax rate cut that went into effect in January 2023. All the major taxes contributed to the $1.4 billion revenue surplus: individual income taxes by $504.3 million, sales and use taxes by $299.4 million, major business taxes by $311.9 million, and property taxes by $99.5 million.
The percentage growth rate for FY23 revenues was 3.0 percent. This follows two years of historically high growth rates. As with June receipts, year-over-year monthly revenue declines are now to be expected given the reduction to the individual income tax rate. An additional tax rate cut, from 4.5 percent to 4.0 percent, will become effective next fiscal year starting in January 2024.
Table 1Summary of FY23 General Fund ReceiptsActual vs. Budgeted Estimate
FY23 FY23 FY23 Diff FY23 Diff Actual Budgeted ($ mil) (%) Sales and Use 5,576.3 5,276.9 299.4 5.7 Individual Income 5,843.9 5,339.6 504.3 9.4 Corp Inc & LLET 1,221.6 909.8 311.9 34.3 Coal Severance 96.6 76.6 20.0 26.0 Cigarette Taxes 299.3 318.6 -19.3 -6.1 Property 774.4 674.9 99.5 14.7 Lottery 337.0 335.0 2.0 0.6 Other 998.7 818.7 180.0 22.0 TOTAL 15,147.7 13,750.0 1,397.7 10.2
A summary of General Fund collections for FY23 and FY22 is shown in Table 2. For the year, receipts grew 3.0 percent, or $445.2 million, over FY22 levels. The sales and use tax, the second largest revenue category, increased by 10.1 percent, the third consecutive year of double-digit growth. After two straight years of significant growth in the major business taxes, they grew by 3.0 percent in FY23, totaling a record $1.2 billion, the highest annual amount ever. Property tax receipts grew by 7.0 percent, the second-largest growth rate in at least 25 years. Lottery receipts continued to perform well, with a 14.2 percent increase over last year. The decline in the individual income tax was entirely due to the reduction in the tax rate from 5 percent to 4.5 percent.
Table 2Summary of General Fund ReceiptsFY23 and FY22
Actual Actual Difference Difference FY23 FY22 ($ mil) (%) Sales and Use 5,576.3 5,062.9 513.4 10.1 Individual Income 5,843.9 6,047.5 -203.6 -3.4 Corp Inc & LLET 1,221.6 1,186.6 25.0 3.0 Coal Severance 96.6 70.7 25.9 36.7 Cigarette Taxes 299.3 324.5 -25.2 -7.8 Property 774.4 723.9 50.5 7.0 Lottery 337.0 295.0 42.0 14.2 Other 998.7 991.5 7.2 0.7 TOTAL 15,147.7 14,702.5 445.2 3.0
Sales and Use Taxes:Sales and use tax receipts had double-digit growth for the third consecutive year, growing 10.1 percent, or $513.4 million in FY23. The three-year span of more than 10 percent growth marks the only three fiscal years in which the sales tax has grown by double-digits since the rate was raised from five to six percent in 1991. Quarterly growth rates for the sales and use tax in FY23 were 12.8 percent, 8.2 percent, 11.2 percent, and 8.2 percent.
Individual Income Tax:After exhibiting strong growth over the past two years, individual income tax receipts declined due to the tax rate reduction from 5.0 percent to 4.5 percent, effective January 2023. The impact of the rate reduction on revenues is apparent by examining the quarterly growth rates. Collections grew in the 8 percent range in the first two quarters of the year but then fell after the rate cut became effective in January. Growth rates for the four quarters were 8.4 percent, 8.8 percent, -3.3 percent and -17.8 percent. Withholding tax receipts grew by 1.5 percent for the year, but were up 7.7 percent during the first six months, then down by -3.9 percent during the last six months of the fiscal year, despite a 10 percent reduction in the withholding tables.
Business Taxes:Combined corporation income and the Limited Liability Entity taxes (LLET) collections grew 3.0 percent, or $25.0 million, compared to last year. After a strong start to the year, receipts fell or were weak for the remaining three quarters. Quarterly tax growth rates were 16.0 percent, -9.2 percent, -0.1 percent and 2.9 percent. These business taxes have grown by 91 percent over the past three years.
Coal Severance Taxes:Coal severance tax revenues have seen demonstrable growth over the past two years, nearly doubling FY21 levels. Collections moderated in the final quarter as the growth rate was in the single digits for the first time since the second quarter of FY22. Receipts in FY23 grew $25.9 million dollars, or 36.7 percent. Quarterly growth rates were 72.2 percent, 41.0 percent, 43.7 percent and 5.6 percent.
Tobacco Taxes:Revenues from the cigarette tax declined again in FY23, falling $25.2 million, or 7.8 percent, as smoking rates continue to fall. Growth rates for this account were negative in all four quarters. The growth rates were -3.4 percent, -9.5 percent, -8.9 percent and -9.4 percent.
Property Taxes:Property tax receipts had an unexpected surge in FY23, increasing 7.0 percent. Real and tangible property, as well as motor vehicles, all grew strongly. Growth was strongest in the year’s first half before moderating in the last six months. Growth rates for the four quarters were 7.8 percent, 7.9 percent, 5.3 percent and 4.9 percent.
Lottery and Other Revenues:Dividend payments from the Kentucky Lottery Corporation to the General Fund rose $42.0 million, or 14.2 percent for the year just ended. The “other” category, which includes multiple taxes and fees such as investment income, inheritance, and insurance premium taxes grew only 0.7 percent for the year. Growth in the “other” account was limited by a $225 million legal settlement in the first quarter of FY22. Quarterly growth rates for the “other” account were -48.7 percent, 25.9 percent, 46.4 percent and 32.2 percent. The historically high amount in “other” income is directly attributable to the investment income earned by the state. Growth in investment income was nearly $150 million higher than last year since interest rates have increased on short-term assets.
Road FundRoad Fund revenues for FY23 totaled $1.75 billion, an increase of 4.7 percent from the previous fiscal year, resulting in a $32.3 million revenue surplus. Total receipts were $78.1 million more than FY22 levels as all the major accounts had increases. After a slow start to the year, collections accelerated in the last nine months of the year. Growth rates for the four quarters were -0.3 percent, 7.3 percent, 5.7 percent and 6.1 percent.
Details of Road Fund collections for FY23 and FY22 are shown in Table 3.
Table 3Summary of Road Fund ReceiptsFY23 vs. FY22
Actual Actual Difference Difference FY23 FY22 ($ mil) (%) Motor Fuels 798.3 774.6 23.6 3.0 Motor Vehicle Usage 660.3 629.1 31.3 5.0 Motor Vehicle License 126.7 123.7 3.1 2.5 Motor Vehicle Operator 29.7 28.5 1.2 4.3 Weight Distance 87.7 87.2 0.5 0.6 Investment Income 6.3 -11.0 17.3 NA Other 44.2 43.3 0.9 2.2 TOTAL 1,753.3 1,675.4 78.0 4.7
Road Fund collections for FY23 exceeded the official revenue forecast by $32.3 million, or 1.9 percent, as shown in Table 4.
Motor fuels tax receipts were relatively flat for the first three-quarters of FY23 as gasoline and special fuels consumption and tax rates stayed static. In response to inflation and surging gas prices, Governor Beshear prevented a two-cent tax increase through an emergency regulation. The Kentucky legislature chose not to extend the tax rate freeze, and the tax rate rose two cents effective March 2023. Motor fuels tax revenue increased accordingly by 8.9 percent from April through June. Quarterly growth rates for motor fuels taxes were -0.7 percent, 4.3 percent, -.06 percent and 8.9 percent.
Motor vehicle usage taxes, imposed at the time of sale, have exceeded expectations, reaching an all-time high of $660.3 million, surging past last year’s high of $629.1 million. Growth rates for the four quarters were 2.2 percent, 5.7 percent, 10.0 percent and 2.4 percent.
Motor vehicle license receipts rose by $3.0 million, while motor vehicle operators’ receipts increased by $1.2 million. Weight distance revenues were unchanged, increasing only $0.5 million compared to FY22. Investment income had an unexpected turnaround when receipts increased from -$11.0 million in FY22 to $6.5 million this year. Lastly, “other” income grew $0.9 million.
Table 4Summary of FY23 Road Fund ReceiptsActual vs. Official Estimate
FY23 FY23 Diff Diff Actual Estimate ($ mil) (%) Motor Fuels 798.3 833.8 -35.5 -4.3 Motor Vehicle Usage 660.3 603.7 56.6 9.4 Motor Vehicle License 126.7 119.4 7.4 6.2 Motor Vehicle Operator 29.7 27.1 2.6 9.7 Weight Distance 87.7 94.6 -6.9 -7.3 Investment Income 6.3 0.1 6.2 NA Other 44.2 42.4 1.8 4.3 TOTAL 1,753.3 1,721.0 32.3 1.9
Five of the seven of the forecasted Road Fund accounts exceeded the estimated amounts and the fund as a whole was above the estimate by $4.7 million. The motor vehicle usage tax was $56.6 million above the estimate, while motor fuel revenues were $35.5 million below the estimate. All other accounts, taken together, were $11.3 million above forecasted levels.
