House Bill 775 Sees Final Passage

UPDATED: Governor Andy Beshear returned House Bill 775 without his signature on March 26.

On March 14, the House gave final passage to House Bill 775 by a vote of 61-23.

On Tuesday, the Kentucky House passed House Bill 775, making several revenue changes related to tourism and economic development. However, a key provision would create more flexibility in the legislature’s approach to reducing individual income taxes. If adopted by the full General Assembly, House Bill 775 would give lawmakers the option to adopt incremental tax rate reductions under certain circumstances.

Coining the measure as “micro-reductions,” committee Chairman Jason Petrie said the bill provides the legislature more flexibility when considering a reduction in the income tax rate. Bill sponsor Rep. Jason Nemes said this bill is similar to approaches taken in Indiana and North Carolina.

Chairman Petrie said this bill evolves from the intent of House Bill 8, passed in 2022, which set up revenue conditions to inform the General Assembly’s decisions to reduce the individual income tax rate. House Bill 8 created a process to allow for rate reductions in 0.5 percentage point increments when the state meets certain savings and spending goals. Specifically, the law requires the state’s Budget Reserve Trust Fund to equal at least 10% of revenues for that year and for revenues to exceed appropriations by an amount equal to a whole percentage point in the individual income tax rate. When those conditions are met, the law permits legislators to reduce the rate by 0.5 percentage points.

House Bill 775 retains the process outlined in House Bill 8 but also allows for smaller rate reductions ranging from 0.1 to 0.4 percentage points, depending on circumstances. For example, if revenues only exceed appropriations by 30% of a full percentage point reduction, the proposal would permit a 0.2 percentage point reduction. This change helps to ensure continued progress in lowering Kentucky’s individual income tax rate.

Under House Bill 8, the income tax rate was lowered three times: in 2022, 2023, and again this year. Since 2018, the legislature’s pro-growth actions have created a flat income tax system and reduced the rate from 6% to 3.5%.  

The Kentucky Chamber Center for Policy and Research’s “A Guide to Kentucky Tax Reform,” report recommended allowing for more incremental rate reductions using the formula from House Bill 8. The report noted that Indiana lowered their tax rate from 3.23% in 2022 to 3.15% in 2023 to 3.05% in 2024. “These reductions are small, but they add up over time and demonstrate to out-of-state businesses and high-skilled workers that state’s commitment to forward progress,” the report stated.

Stay tuned to The Bottom Line for more updates during the 2025 legislative session.