KLC Testifies on Need for Revenue Diversification

Legislators heard about the need for modernization of local tax codes during an interim joint committee meeting at the Kentucky State Fair in Louisville on Thursday. KLC Executive Director/CEO J.D. Chaney testified with other local government representatives about amending a 131-year-old section of the Kentucky Constitution. Chaney stressed that a proposed constitutional amendment would be the first step and would not result in any new taxes or changes on the local level.

Representative Michael Meredith (R-Oakland) chairs the House Local Government Committee and filed two measures in the 2022 Regular Session to put the question before voters. He intends to file similar legislation in the 2023 session. He maintained that local tax reform is the logical next step as Kentucky shifts away from taxing productivity.

The state anticipates lowering the income tax this January as part of the tax reform bill legislators passed in the 2022 session. Meredith said legislators must consider enacting the same type of reforms at the local level to ensure Kentucky continues to move in a direction that promotes economic growth.

He noted that decades of task forces and studies have come to the same conclusion. “The thing that we are going to have to do is to amend Section 181 of the constitution and make our revenue plan more flexible,” Meredith explained. He emphasized that voters would have to approve the change, giving the legislature the authority to create a more modern local tax framework. “What we pass ‒ the constitutional amendment ‒ will not be the ultimate policy,” Meredith added.

Chaney testified that the amendment would remove a limitation on the General Assembly’s power. “You can only do property taxes, occupational taxes, or franchise fees. You can only authorize local governments to do those three things.” He clarified that local governments need voters to give the legislature more modern options. “Ultimately, those policy decisions will be made by the legislature.”

Nearly 60% of all local tax revenue comes from occupational taxes, forcing local governments to tax productivity to provide the quality-of-life services people expect. Chaney pointed out that people who work and live in the city end up paying the entire bill for public safety, parks, roads, and other services everyone enjoys. “Right now, we have zero ability to collect funds from people who travel, visit, and come through our cities. They take advantage of those resources but do not contribute to their cost,” he said. “We think shifting that burden away from our local residents who bear all of it is very worthwhile in a policy discussion.”