Kentucky’s Republican supermajority slid a last-minute massive tax overhaul into a bill before it cleared a committee, and hours before it passed the House chamber Tuesday. The most significant change in the bill would make it easier to hit annual budget triggers for income tax cuts.

House Bill 775 was previously a four-page bill allowing Louisville to create a small tax increment financing district, or TIF, within an existing large TIF for the Yum! Center downtown.

With little advance notice — and before the changes to the bill were posted online for the public to read — HB 775 turned into a 107-page committee substitute with several tax-related changes, including tourism tax incentives and making hemp-derived beverages subject to the same wholesale and excise tax rate as distilled spirits.

The new language of the bill would also allow the individual income tax rate to be lowered even if the state didn’t hit the budget triggers in existing law, though at smaller increments.

The bill cleared the committee on a party-line vote and was then passed by a 67-18 vote in the House chamber hours later, with no Democrats voting for the bill. It could clear the Senate by the end of the week, with Friday being the last day of the legislative session before the governor’s veto period begins — allowing a veto override at the end of March.

Democratic lawmakers decried how fast the major tax changes moved from a committee substitute into a law that cleared the chamber in just a matter of hours, saying it subverted public input and scrutiny.

After HB 775 cleared the committee Tuesday morning, GOP Rep. Jason Petrie of Elkton — the chairman of the House budget committee who presented the committee sub — left the room through a side door and did not take questions from reporters.

Democratic state Rep. Tina Bojanowski of Louisville said committee members received the lengthy substitute bill the day before. She hoped the GOP supermajority would not move it to the House floor Tuesday afternoon before its contents and fiscal analysis were posted on the bill’s public webpage — which is what happened.

“We heard it in (committee) this morning, and here it is on the floor today,” Bojanowski said when the bill was called to the House floor. “What's problematic with that is that the public has no option to see what is in this legislation before we pass it on the floor.”

The most significant change of HB 775 appears to be altering Kentucky’s tax cut trigger system. A landmark Republican bill from 2022 created a system to incrementally lower Kentucky’s individual income tax rate until it is eliminated, so long as certain budget conditions are met.

Under current law, the income tax rate can be lowered by half a percentage point each year if:

• The state’s budget reserve trust fund at the end of a fiscal year is equal or greater than 10% of General Fund Revenue in that fiscal year.
• General Fund revenue in a fiscal year would have been greater than General Fund spending in that fiscal year if the individual income tax rate had been one percentage point lower.

Whereas now, the tax rate is either lowered by half a percentage point or remains the same, the new language of HB 775 would allow the rate to be lowered by a smaller amount if the second trigger is not met in future years.

The bill now allows the income tax rate to be lowered by either .1, .2, .3 or .4 percentage points, so long as the budget reserve trust fund trigger is met and depending on how close the second trigger was to being met. The actual tax cut each year would also have to be finalized by a vote of the legislature.

The lowest tax rate cut of .1 percentage points could be triggered if General Fund revenue was greater than what General Fund spending would be if the tax rate was anywhere up to .25 percentage points lower.

The cuts would be:

• .2 percentage points in the range from .25% to .5% 
• .3 percentage points in the range from .5% to .75% 
• .4 percentage points from .75% to 1%. 

According to a fiscal note estimate for House Bill 1 — which passed into law earlier this year and lowers this tax rate to 3.5% in 2026 — an individual income tax rate cut of half a percentage point would lower Kentucky’s General Fund revenue annually by $718 million in future years.

There is no public fiscal note for the bill that estimates how much lower General Fund revenue would be in future years if the rate was lowered by smaller increments. Legislators in the House committee were given an “estimated impact memorandum” for the bill created by Legislative Research Commission staff, but it made no attempt to analyze the impact of this provision, only stating it “Requires General Assembly Approval.”

Petrie, the House budget chair, said in committee this system of allowing smaller increments of tax cuts would resemble the system in place in North Carolina and Indiana.

GOP leadership in both chambers have indicated over the past year that despite the state hitting the budget triggers this year, Kentucky’s economic forecast shows the chances of hitting triggers in the coming years is very low, unless other major structural changes are made to the budget.

Some Republican members have openly pushed for changing the tax trigger system to allow larger incremental tax cuts, as GOP state Sen. Gex Williams of Verona did in the floor debate over HB 1 in February.

Asked by Democrats in committee why Petrie wanted the tax trigger changes of HB 755, he said it was only a slight modification to an existing program.

“As conditions change, as viewpoints change, and as future planning changes, we modify programs and systems and decision trees to accommodate that,” Petrie said. “This continues with the same policy of reduction, it continues with the same policy of conditions, and it should be of some satisfaction to some that we may not hit a half a point, but we may hit something smaller, so that more state revenue continues to come in.”

Petrie added that the size of the incremental tax cuts has been a point of discussion since the legislature created the system in 2022, and HB 775 is “just an evolution of that conversation.”

Critics of Kentucky’s existing tax trigger system have said it creates permanent tax cuts in the face of a projected decline in revenue over the near term, as the temporary surpluses created by the large federal stimulus and pandemic-spurred global inflation in recent years will soon run dry and morph into deficits.

Jason Bailey, the executive director of left-leaning think tank Kentucky Center for Economic Policy, is one of those critics.

Noting the GOP supermajority exempted certain spending from counting towards the budget triggers in last year’s budget bill, Bailey said HB 775 “moves the goalposts once again on the legislature's income tax cut triggers, allowing additional cuts even as the costs of those already in place grow.”

“Under these changes, if revenues exceed spending as defined in the bill by just one penny in one year, it would allow for permanent tax cuts costing over $100 million every year,” said Bailey, referring to a reduction of .1 percentage points.

During the debate on the House floor, Democratic Rep. Lisa Willner of Louisville said there is too much uncertainty at the federal level right now to make such a change to the state’s tax cut triggers. She noted that Kentucky is one of the states most reliant on federal programs such as Medicaid, and may need to redirect government funding if the Trump administration follows through on promises of massive cuts.

“We don't know what's going to happen, and it concerns me that we're making it a little too easy to give up our much needed tax revenue, how that might shred the social safety net over time,” Willner said.

GOP Rep. Ken Fleming of Louisville spoke in support of the tax changes, calling it “a very responsible bill” that continues “putting money back in your pocket.”

Republicans say the objective of the tax cuts is to increase the population of Kentucky, arguing it would lure more people and employers to locate and remain there. They often cite neighboring Tennessee as their model, which has no individual income tax and whose population has increased substantially compared to Kentucky.

GOP House Speaker David Osborne later said he was fine with the process of how HB 775 moved quickly from a committee substitute to the floor of the chamber, saying “just about every one of those issues has existed in another bill.”

Osborne added that the tax cut trigger “has been discussed now for three years,” saying “it just means we can take it down less than a half (percentage) point if we choose to… We did not amend the formula.”

Tax incentives, tourism and hemp beverage taxation

Among the other tax provisions of HB 775 are ones related to specific projects and entertainment events in Louisville, lodging facility projects in smaller counties and an increase in tax on hemp-infused beverages.

This includes the original provisions of HB 775, which allows Louisville’s city government to create smaller TIF districts inside of the large Yum! Center TIF district downtown, which Mayor Craig Greenberg has advocated for.

Also related specifically to Louisville, the amended bill would allow the resurrection of TIF incentives for an unnamed project in the city that was first approved in 2007, but later withdrawn before the project was completed. Osborne later confirmed that this referred to the Museum Plaza project, though it would allow a different development to go on the same plot of land in downtown Louisville.

Also specific to Louisville, a provision would give tax incentives to entertainment events lasting at least three days and having at least 100,000 attendees. Under the bill, these events would be able to recoup 50% of the sales taxes on admissions and services — estimated at nearly $3 million per year.

Willner noted that a series of concerts at the Fairgrounds in Louisville — including Bourbon & Beyond — is owned by an out-of-state company.

In counties with a population of less than 20,000, HB 775 would allow “lodging facility projects” to recoup up to 50% of sales taxes for a period of 20 years. Petrie indicated this provision would help those in the “east and west” of the state.

The bill also subjects hemp beverages — which have been legal for those 21 years and older and regulated by the state over the past two years — to the same wholesale and excise tax rate as distilled spirits, such as bourbon. The products are currently only subject to sales taxes.

The hemp industry has advocated for these beverages to be taxed at the same wholesale and excise rates as beer, which is significantly lower than distilled spirits. Another bill that cleared the Senate would add regulations on the sale of hemp beverages and prohibit the sale of those with more than 5 milligrams of THC — which the industry also opposes.

State government and politics reporting is supported in part by the Corporation for Public Broadcasting.