The Kentucky legislature has long promised to eliminate the state income tax, and HB 1 is part of that process. Under the current system, the income tax can be lowered by 0.5% if certain triggers are met to keep the budget afloat, and since that has happened, Governor Beshear signed HB 1 into law, reducing Kentucky’s income tax from 4.0% to 3.5%.
HB 775 takes this system a step further. Now, income taxes can be lowered by increments as small as 0.1%, a change that would require a much smaller threshold than the current 0.5% cuts.
Under the current law, for a cut to happen, two things must be true. First, the Budget Reserve Trust Fund (or the “rainy day” fund) has to be equal to 10% of the state’s General Fund (the money they collect through most taxes). This includes the budget hit that the proposed tax cut would bring.
The second is that, for a 0.5% reduction, revenues must exceed expenditures by an amount that is greater than a 1% income tax on Kentuckians.
HB 775 does not change either of these. It only introduces four new cuts that the legislature can bring: 0.1%, 0.2%, 0.3%, and 0.4%. It also says that, for any proposed cut, revenue must exceed expenditures by twice the amount that the cut proposes.
That’s densely worded, so let’s see an example. In 2028, the year HB 775 would go into effect, a 1% income tax would yield $1.3 billion. If revenues exceeded expenditures by that amount, then a 0.5% tax cut would be allowed, which would reduce the budget by $650 million. This is all true under current law. Under HB 775, if revenue exceeded expenditures by only $544 million—the same amount as a 0.4% income tax—the legislature could cut taxes by 0.2%—half of the amount they could reduce with a balanced budget. It’s important to note that these cuts can only be as low as 0.1% and as high as 0.5%.
The way current tax law works is complicated, and HB 775 does not change the formulas for when a tax cut is allowed.
The Kentucky Center for Economic Policy released a more thorough analysis, available here.