Budget triggers to further cut KY income tax are not met Skip to content

Budget triggers to further cut KY income tax are not met

Assuming they honor the triggers they put in place, the legislature will not be able to continue giving income tax cuts to the wealthy.

Via press release from KY Policy

The triggers Kentucky’s legislature set to allow continued cuts to the state’s income tax rate have not been met this year, according to a letter released by the Office of the State Budget Director.

That means the 2024 General Assembly will not pass more tax giveaways skewed to the wealthy on top of those passed the last two years.

2022’s House Bill 8 requires two conditions be met for the legislature to reduce the income tax rate by half a percentage point. The first is that the state’s Budget Reserve Trust Fund, often called the rainy day fund, must be 10% or more of General Fund revenues from the preceding year. That condition was met this year.

But the second condition did not come close to being met. It requires state revenues to equal or exceed appropriations plus the cost of a 1% point reduction in the income tax rate. That means the state needed to bring in around $1.2 billion more than it appropriated in fiscal year 2023 to consider more tax cuts. Instead they fell $435 million short.

The failure to hit that target comes despite an all-time low unemployment rate and high inflation, both of which drive up total tax receipts.

The inability to hit the triggers despite positive economic conditions is because of two key reasons:

  • Cutting the income tax is incredibly expensive. Prior to recent cuts, it was the state’s largest revenue source, funding 41% of the budget. That means even small rate cuts are incredibly costly, as evidenced by the failure to hit this year’s revenue target despite a previously passed 0.5% cut being in place for only half the fiscal year.
  • The state’s budget needs are tremendous. Cutting state spending to the degree required to trigger new cuts is difficult and would require shrinking an already austere budget even more. The current budget did not adequately meet Kentucky’s needs, but it did put money toward a few areas including disaster relief, much-needed employee raises, and FRYSCs that support low-income kids. A budget that allows for more tax cuts would require eliminating spending like that.

“Failing to meet the trigger at a time when it’s easiest to do so because of national economic conditions should send a clear message,” said Jason Bailey, KyPolicy Executive Director. “It’s time to put a halt to further cuts and focus on the education, health and infrastructure investments communities must have in order to thrive.”

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