November 25, 2019 11:12am
Op-Ed: Kentucky cities, counties need control over revenue, freedom to create own tax systems
This article first appeared in The Courier-Journal on November 22, 2019.
In the business world, crisis tends to pave the way for positive change and transformation; so too, it turns out, for the worlds of government and public policy.
Earlier this year, Louisville’s elected leaders found themselves staring down a multimillion-dollar budget shortfall brought on by Kentucky’s crushing public pension debt. With few options available, they weighed increasing an unpopular tax against cuts to spending, ultimately deciding on the latter.
This crisis will repeat itself next year when Louisville and other local governments are faced with even larger pension bills.
As I wrote in an op-ed for The Courier-Journal back in March, this is an unenviable situation, to say the least.
On the other hand, it very well may lead to positive change and transformation as lawmakers in Frankfort give serious thought to reforming how state law allows local governments to generate revenues. GLI is working to shape these conversations with the bold, forward-thinking ideas of the greater Louisville business community.
Giving local governments more control over local revenues should certainly result in helping all Kentucky cities and counties meet their pension obligations. But reforms must also serve as an opportunity to give local governments the freedom and flexibility to recreate their tax systems to more effectively support economic growth.
Passing legislation in Frankfort to give local governments more freedom when it comes to structuring their revenue streams has been a longtime GLI priority. For readers unfamiliar with the intersection of state law and local taxation, Kentucky law tightly restricts how cities and counties generate revenues. These restrictions have made it more difficult for localities to cope with pension obligations and enact reforms to support economic growth.
GLI’s members recently took a deep dive into these issues to outline specific steps that the GeneralAssembly should take to give cities and counties more flexibility and control over local revenues. I would like to share two core concepts that GLI will be advocating for in Frankfort next year.
First, local governments need the ability to generate more revenues. Most Kentucky cities and counties — Louisville Metro included — already operate under lean budgets. Expecting them to meet rising pension obligations, provide core services and make investments in the future solely through belt-tightening is unrealistic.
The General Assembly must find a way for cities and counties to diversify their general fund revenue streams through sales taxes. Whether this happens through a constitutional amendment or a reallocation of state sales tax revenues, our members feel strongly that localities should be able to meet general fund obligations with broad-based sales taxes levied and collected in alignment with state rules.
Our members also believe it is time to revisit the 4% recall threshold on annual property tax revenue growth. Reassessing this 40-year-old state law would be especially important for cities and counties that would not benefit from a local sales tax and would empower local governments to identify revenue streams that make the most sense for their community.
Second, local government tax reform cannot be solely about new revenues. Reform must also be about creating opportunities for local governments to decrease their reliance on occupational licensing taxes. Current Kentucky law effectively forces cities like Louisville to generate the bulk of their revenues from taxing business net profits and wages. This puts us at a disadvantage when it comes to competing for jobs and talent with cities like Nashville, Charlotte, and Jacksonville. These cities rely minimally or not at all on production-based taxes, making them more attractive to both businesses and workers. If new sources of revenue become available to cities and counties in Kentucky, state law should incentivize a shift away from taxing production and work. This would boost the economic competitiveness of Kentucky’s cities.
Reforms to local government taxation in Kentucky have been a long time coming. While we all wish these conversations were taking place under better fiscal circumstances, we would do well to remember that such situations tend to bring stakeholders together to find bold, workable solutions to major challenges. What will be most important in the months ahead is that greater Louisville speaks to Frankfort and other parts of the commonwealth with a unified voice in advocating for the freedom and flexibility to rethink local tax structures to more effectively meet public obligations and support economic growth. I encourage all members of our community to work together on this important issue and to join us in advocating for reforms to local government taxation in Kentucky that will move greater Louisville forward.