AN ACT relating to state service employee compensation.
Summary
HB338 amends Kentucky’s individual income tax conformity statute to create a new state income tax exclusion for wages earned by “state service employees” beginning on or after January 1, 2026. The bill defines a state service employee as a person regularly appointed to a position in the executive, legislative, or judicial branch and compensated on a full-time, part-time, or interim basis, while expressly excluding members of the General Assembly. Under the bill, all wages earned by these employees would be excluded from adjusted gross income for Kentucky income tax purposes.
The measure is framed as a compensation-related tax benefit for state government workers, and it would operate within the existing list of Kentucky-specific additions and subtractions used to calculate adjusted gross income and net income. It does not change federal tax law, but it would reduce Kentucky taxable income for the covered employees and therefore lower their state income tax liability. The bill also leaves intact the rest of Kentucky’s tax conformity structure, including existing exclusions for pensions, military pay, Social Security, and other specified income items.
Impact
HB338 would amend KRS 141.019, Kentucky’s statute governing how individual adjusted gross income and net income are calculated for state tax purposes. The practical effect would be to exempt all wages earned by covered state service employees from Kentucky income tax starting in tax year 2026, affecting employees in the executive, legislative, and judicial branches except legislators themselves. This would reduce taxable income for those workers and could decrease state revenue from individual income taxes, while creating a new class of income exclusion in Kentucky tax law.
Sentiment
There is no recorded committee transcript or vote history in the provided materials, so there is no direct evidence of debate, support, or opposition from lawmakers. Based on the bill text alone, the measure appears favorable to state employees because it provides a targeted tax benefit tied to public service compensation. The caption and structure suggest a policy choice to reward or offset compensation for state workers rather than a broad tax reform.
Contention
The main point of potential contention is the scope of the tax exclusion and who qualifies as a “state service employee.” Because the bill exempts wages for employees across the executive, legislative, and judicial branches but excludes members of the General Assembly, lawmakers may question whether the benefit is too broad, too narrow, or unevenly applied. Another likely issue is fiscal impact, since exempting all covered wages would reduce state income tax collections and could be criticized as a targeted tax preference rather than a general pay increase.