City officials heavily rely on occupational taxes to pay for the essential services necessary for Kentucky’s growing communities. That was the message to legislators who spent nearly two hours Monday morning reviewing how local governments collect funds, budget, and pay for the amenities, public safety, and other programs people and businesses expect. “Occupational tax is the lifeblood of local governments in Kentucky,” Crestview Hills Tax Compliance Officer Larry Klein stated.

Georgetown-Scott County Revenue Director Scott Hall, who also serves on the KLC Board of Directors, explained that workers pay the majority of occupational taxes. In Georgetown, Hall stated the city collects 88% of its occupational taxes from paychecks.

An overreliance on taxing productivity is the main reason KLC and other entities support a proposed constitutional amendment that would remove restrictive language in Section 181 of the Kentucky Constitution. The language, adopted in 1891, stops the legislature from considering more modern, consumption-based local taxation.

“Our constitution limits the types of revenue local governments can collect,” KLC Executive Director|CEO James D. Chaney said. “It’s not just a restriction on city governments, but it is a restriction on this legislature. It restricts what the legislature can authorize.”

Because of the limitation, Chaney reported that 59% of city general fund tax revenue comes from occupational taxes. Other taxes and various fees account for the remaining 41%.

Cities must adopt a balanced budget every year through an ordinance. A city’s legislative body must approve the budget and can amend it depending on revenue and expenses. Cities can only spend funds in accordance with the adopted budget ordinance.

While most city funds are spent on employee salaries, general operations, and capital expenses, Chaney explained that street costs continue to take a larger chunk. Money collected through the state’s motor fuels tax is the only portion of the Road Fund shared with local governments. Most of that, 73%, goes to counties for rural roads – paying a majority of county expenses. That leaves city governments to cover the cost of maintaining city streets, which are often more expensive to build and repair. “Eighty percent (80%) of road and street maintenance comes out of city funds,” Chaney remarked. Those are dollars that could help pay for vital services, such as police, fire, EMS, and utilities.

Senator Chris McDaniel (R-Ryland Heights) asked about the centralized collection of local taxes. Hall quickly responded that such a move would be bad for Kentucky’s local governments and people who live and work in the community. “You would not think it was a good idea for the IRS to come in and take over the collection of state taxes. You know best at the state level how to collect your funds – how to disperse it,” Hall stated. “It’s the same at the local level. Some of the collaboration relationships we have, we are able to expedite things.”

“At the local level, we know best. Just as you know best at the state level,” Klein added. He said keeping collection at the local level ensures businesses and other taxpayers have a local office and local people to talk to when a situation arises instead of requiring them to go through a bureaucratic state office.

“Local decisions are best made at the local level,” Chaney said.