House Bill (HB) 775 in the Kentucky General Assembly would move the goalposts yet again on the state’s income tax cut trigger formula. As the costs for these cuts grow, the bill lowers the bar so the legislature can continue reducing the tax even if the state is not generating more revenues than it is spending. For example, revenues could simply equal expenditures for one year, leaving no extra for added savings, and the triggers would allow permanent cuts in the income tax totaling over $130 million a year.
Bill introduces smaller triggers that are easier to meet
HB 8 in the 2022 legislative session established two requirements that must both be met in a fiscal year to trigger income tax cuts the following year. HB 775 does not change the requirement that mandates an amount equal to at least 10% of revenues is in the Budget Reserve Trust Fund for the year in question. But it lowers the threshold for hitting the second requirement, which currently says revenues must exceed expenditures in that year by an amount equal to at least the revenue from a 1% income tax.
For example, let’s assume that a 1% income tax would generate $1.3 billion in 2026, the year this change would go into effect. Under current law, if revenues exceed expenditures (as defined under the law) by $1.3 billion, the legislature has “permission” under the trigger to reduce the income tax by 0.5%, which would result in $650 million in permanently lost revenue each year in the future. If revenues exceed expenditures by less than $1.3 billion, the law does not recommend cuts.
Under the revised language, incremental levels are established that allow tax cuts to be triggered in any case where revenues are at least equal the amount appropriated by the General Assembly, no extra revenues required. Therefore, using the example given above, even with a balanced budget in which the amount spent equals the amount collected, the trigger mechanism would recommend cutting the income tax by $130 million per year going forward, or 0.1%. If revenues exceed expenditures by between $325 million and $649 million, the mechanism recommends cutting the income tax by $260 million annually, or 0.2%. Other scenarios are shown in the table below.
HB 775 would recommend tax cuts any year there’s not a budget deficit
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. 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.
These tax cuts go overwhelmingly to the wealthiest residents of the state, and no proponent of continuing to cut the individual income tax has identified how the enormous lost revenue from a major state revenue source will be replaced. HB 775 will put additional pressure on the General Assembly to pass tax cuts nearly every year at the expense of current investment in education, Medicaid, infrastructure and other critical services.
