“We need cities and counties to be able to reinvest in themselves.” That was the message on Wednesday afternoon when legislators discussed amending an outdated section of the Kentucky Constitution. Section 181 limits the legislature’s ability to craft local tax policies, which limits local governments to just a few productivity-based revenue options established more than 130 years ago. Representative Michael Meredith (R-Oakland) previously sponsored legislation that would allow voters to modernize the language.
The constitution severely limits how local governments pay for the services that attract new jobs and maintain quality of life. As a result, residents, businesses, and workers solely fund everything from police and emergency medical services (EMS) to streets and parks. Representative Jason Nemes (R-Louisville) pointed out that taxpayers are now “soaked” by the burden.
Diversifying the local tax base to include revenue from tourists and others allows more people to share the responsibility. “Our tourists should be paying for those services,” Meredith added, “just like our residents are.” Meredith and others testifying stressed that increasing who pays into the system to help fund vital services would reduce costs for those currently footing the entire bill. “Our goal here is to grow the pie,” Meredith explained.
KLC Executive Director|CEO James D. Chaney told the Interim Joint Committee on Appropriations and Revenue that leaving the status quo for local revenue would strongly impede the momentum legislators started last year with the passage of House Bill 8. “If you change nothing, nothing will change,” he remarked.
House Bill 8 established specific criteria to incrementally reduce Kentucky’s individual income tax until it is eliminated. The first reduction takes effect in January 2023.
Meredith stressed that the constitutional amendment is the next step in the process. A 1996 legislative task force and 2006 review drew the same conclusion. Meredith said the goal has not changed. “Our focus has been and continues to be transitioning away from our current system of overreliance on income-based taxes and replacing them with a consumption-based tax that better aligns our tax code with peer states that we compete against.”
Business representatives testifying on Wednesday agreed. “Reliance on occupational taxes and net profit taxes is an outlier when we’re looking at jobs and talent,” testified Andi Johnson, chief policy officer and director of regional engagement at Commerce Lexington. “A contemporary tax policy can give communities the ability to be agile in addressing issues around growth, business and industrial development, housing, recreation, and other common essentials that we all have to build great communities,” added Amanda Davenport, executive director of the Lake Barkley Partnership.
Chaney reminded legislators that the constitutional amendment only removes the restrictive language currently in Section 181. “This doesn’t say local governments can do whatever they want,” he said. “It doesn’t mandate General Assembly action. It just gives you the authority.” The bill would not create any new taxes, and language in a companion bill would ensure cities continue to function with the same taxing options they currently have until the legislature enacts new policies in future sessions.
Photo Caption: Representative Michael Meredith showed members of the committee a satellite map of the growth in nearby Clarksville, Tennessee. The state relies more on consumption-based taxes than Kentucky and has seen sizeable growth in cities near the Kentucky border.