House Bill would make it easier to cut KY income taxes by allowing smaller increments
The Kentucky House introduced and passed a bill Tuesday that would allow the General Assembly to cut the state income tax in a completely different way.
House Bill 775 morphed from four pages to more than 100 due to a committee substitute introduced Tuesday morning. The revised bill would allow the General Assembly to reduce the income tax more frequently than the existing system, which only gives the legislature the option to OK a half-percent drop at a time.
Under the bill, the individual income tax could drop at increments of one-tenth a percentage point — as little as 0.1% or as much as 0.5%. The state income tax rate is currently 4% and is set to drop to 3.5% next year after the passage of House Bill 1.
The bill, sponsored by Majority Whip Jason Nemes, R-Middletown, was initially limited to making small changes on the state’s tax increment financing districts.
The bill touched on a variety of other topics, namely including tax increment financing districts and other tax incentives in both high-population centers like Lexington and Louisville as well as less-populous counties.
The current law requires set budgetary “triggers” to be met before the tax can be reduced.
For the half-point drop to occur, the balance in the state Budget Reserve Trust Fund must be equal to or greater than 10% of the General Fund revenue that year; also, General Fund revenue must be equal or greater to the appropriations for the year plus the cost of cutting the individual income tax by a full percentage point.
The trigger around the Budget Reserve Trust Fund, also known as the “rainy day fund,” remains unchanged, but the income tax rate can drop 0.1% as long as General Fund revenues at least equal appropriations.
The rate can drop 0.2% if revenues equal appropriations plus the cost of between a 0.25 and 0.5 percentage point cut. It can drop 0.3% if revenues equal appropriations plus the cost of between a 0.5 and 0.75 percentage point cut to the income tax, and it can be dropped 0.4% if the General Fund revenues equal appropriations plus the cost of between a 0.75 and a full percentage point cut.
Democrats in both the morning committee where the revamped bill passed and on the House floor later in the afternoon criticized the quick process of passage for the high-impact bill.
Rep. Adam Moore, D-Lexington, made a motion to table the bill, but it failed along party lines. He cited the fact that the bill was not available on the Legislative Research Commission’s publicly available website as reason to set it aside.
“If I was a normal constituent, I would not be able to go and find that on the online digital journal… I always want to think that people I’m representing here would have the opportunity to put eyes on (a bill) as well, especially when it’s something that is 100 pages,” Moore said. “I have faith in a lot of things, but 100 pages of legislation that just showed up — it’s hard to have a lot of faith in.”
The bill passed the House 67-18, with Democrats voting against it.
After the bill’s passage, House Speaker David Osborne, R-Prospect, emphasized that the income tax cuts have long been a part of the public discourse since the current march to zero income tax was kicked off with 2022’s House Bill 8.
“The trigger has been discussed now for three years. It’s the exact same formula, it just means we can take it down less than a half-point, if we choose to,” Osborne said.
Jason Bailey, executive director of the Kentucky Center for Economic Policy think tank, has long been a critic of the GOP-led efforts to cut the income tax. He said that the change “moves the goalposts” yet again to allow the legislature to cut taxes more often.
“Not only are these thresholds easier to surpass than those in the existing law, but the tax cuts are larger relative to the size of the one-year surplus,” Bailey wrote. “It results in a situation where a tax cut will be ‘recommended’ any year in which there is not a budget deficit.
“The full impact of the tax cuts doesn’t appear until two fiscal years after the formula determines them to be affordable, pushing the pain forward to future budget cycles.”
House Bill 775 is now in possession of the Senate, which still has time to pass it before the veto period begins on Saturday.
