The Republican supermajority of the Kentucky General Assembly passed a bill that would make it easier for the state to hit annual budget triggers for cuts to the individual income tax rate — speeding up their goal of eliminating the tax.
House Bill 775 received final passage Friday evening, the last day of the 2025 legislation session to pass bills that are veto-proof. Democratic Gov. Andy Beshear can veto legislation over the next two weeks, but the GOP-dominated General Assembly can override any veto with a majority vote in the final two days of the session in late March.
A landmark Republican bill from 2022 created a trigger system to incrementally lower Kentucky’s individual income tax rate until it is eliminated, so long as certain budget conditions are met each fiscal year. If the state’s budget reserve trust fund and surpluses reach certain levels, the income tax rate could be lowered by half a percentage point. If the triggers are not met in a given year, the rate would remain the same.
A late amendment HB 775 in a House committee Tuesday allowed the tax rate to be lowered even if the triggers were not met, though at a lower percentage than half a percentage point. That version of the bill cleared the full House chamber hours later, before the bill’s language — changed from a four-page bill to a sprawling 107-page bill with many tax changes — was posted online for the public to read.
The bill was amended again in the Senate budget committee Friday, still allowing smaller tax cuts if the triggers were not met, but making those complicated trigger thresholds more difficult to be reached than the House version of HB 775. The bill received final passage late that night.
Kentucky hit the fiscal year triggers for a tax cut last summer, with the General Assembly finalizing the half percentage point cut at the beginning of the session in House Bill 1. According to a fiscal note estimate for that bill — which lowers the income tax rate from 4% to 3.5% in 2026 — a cut of half a percentage point would lower Kentucky’s General Fund revenue annually by $718 million in future years.
The version of HB 775 that passed into law would allow a cut of half that amount — one-fourth of a percentage point — in the next two fiscal years if the state fell short of the triggers, but close enough for the range within the bill. Following those two years, the rate could be cut by .1, .2, .3 or .4 percentage points, depending on the size of budget surpluses.
GOP leadership in both chambers have indicated over the past year that despite the state hitting the budget triggers last year, Kentucky’s economic forecast indicates the chances of hitting triggers in the coming years is very low, unless other major structural changes are made to the budget. Some in the party have advocated for changes to the trigger law that would speed up the end goal: ending the income tax.
Democrats and other critics of the trigger system say 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 — putting at risk major investments in public K-12 education and Medicaid.
How the tax cut triggers would work
The precise mechanism for how the tax cut triggers work is already complicated, and would become even more so if HB 775 becomes law.
Under current law, the income tax rate can be lowered by half a percentage point if both of the following budget conditions are met at the end of a fiscal year:
- The budget reserve trust fund is at least 10% of General Fund revenue that year;
- If the tax rate had been one percentage point lower in that fiscal year, General Fund revenue still would have been more than General Fund spending.
That remains the same in HB 775, but sets up an additional formula that allows the cut of a smaller amount so long as the first 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.
If the bill becomes law, for the next two years the formula would work like this on the second trigger:
- If the fiscal year surplus (General Fund revenue minus General Fund spending) is more than 50% of the revenue that would have been lost had the tax rate been 1% lower, then the individual income tax rate could be lowered by .25 percentage points.
- If the fiscal year surplus is less than 50% of the revenue that would have been lost if the tax rate had been 1% lower, then the trigger has not been reached and the tax rate remains the same.
For example, if the state would have had $500 million less revenue with a tax rate that was 1 percentage point lower, it must have a budget surplus of at least $250 million in order to lower the future tax rate by .25 percentage points. That’s opposed to the current trigger, in which the surplus would need to be more than $500 million.
After those next two fiscal years, the formula for the second trigger changes again, allowing cuts of tenths of a percentage point, from .1 to .4. Just as the previous two years, the amount of the cuts follows how large the surplus is.
Again using the hypothetical example of the state having $500 million less with a tax rate that is one percent lower:
- If the state has a budget surplus between 20% and 40% of that amount ($100 million to $200 million), the income tax rate can be lowered by .1 percentage points.
- If the state has a budget surplus between 40% and 60% of that amount ($200 million to $300 million), the income tax rate can be lowered by .2 percentage points.
- If the state has a budget surplus between 60% and 80% of that amount ($300 million to $400 million), the income tax rate can be lowered by .3 percentage points.
- If the state has a budget surplus between 80% and 100% of that amount ($400 million to $500 million), the income tax rate can be lowered by .4 percentage points.
The Senate budget committee on Friday morning amended HB 775 to its final version of the triggers, altering the House’s version of the bill that would have made it easier to at least allow a reduction of .1 percentage points.
Under the House version of the bill, in order to hit the lowest .1% trigger threshold, the budget would only have to have a surplus of at least one penny — along with the budget reserve trust fund amount — in order to hit the second trigger and allow a tax cut. Based on the fiscal note estimate of a half percent tax rate reduction annually, the .1% cut could amount to as much as a $143 million reduction in General Fund revenue in such a year.
Sen. Chris McDaniel, the GOP chairman of the Senate budget committee, said Friday morning they altered the House version of the triggers “to clean that up,” referring to the one penny surplus scenario.
The ‘Kansas situation’
The previous night, GOP Senate President Pro Tempore David Givens of Greensburg hinted at the coming change to the HB 775 triggers, which he said were needed to ensure that Kentucky doesn’t cut taxes too quickly.
“As long as I have an input in the process, we're going to have a two-times delta above whatever cut we take to make sure that we don't end up in the Kansas situation,” Givens.
The “Kansas situation” refers to what happened in the state when it enacted large tax cuts in 2012 and 2013, spurring a budget meltdown in the ensuing years and the 2017 rolling back of the tax cuts. Kansas did not experience the economic growth they were hoping for following the tax cuts, causing state revenues to dramatically decrease and spurring emergency cuts to public education and other government services, as well as downgrades to their bond ratings.
During the 2022 debate on the bill creating the tax cut system, Frankfort Republicans repeatedly said the triggers would prevent Kentucky from following in the footsteps of Kansas — as the cuts would be gradual and only happen when budget conditions were favorable.
This past December, McDaniel said the current trigger system is working as the deliberate and long term project they intended to be, citing as examples both Kansas and the previous year that Kentucky failed to hit the trigger and did not cut taxes.
“We've seen examples of other states where they were overly aggressive with what they did, and it not only forced them to make some very difficult mid-cycle decisions, but it also really derailed a lot of their efforts in reducing the income tax because they lost public opinion,” McDaniel said.
Asked Friday if he had any concerns that HB 775 may allow Kentucky to cut taxes too quickly, he replied: “I'm really not that worried about the change.”
As of Sunday evening, there is no public fiscal note attached to HB 775 on its webpage, which is the document produced by legislative staff to estimate how legislation will affect state revenue and appropriations in future years. The version of HB 775 that passed the House earlier in the week had an “estimated impact memorandum” that was distributed to members of the budget committee, but made no attempt to analyze what the fiscal impact of the changes to the trigger system would be.
State government and politics reporting is supported in part by the Corporation for Public Broadcasting.
