Call to Order and Roll Call
The 2nd meeting of the Interim Joint Committee on Local Government was held on Wednesday, September 25, 2013, at 10:00 AM, in Room 171 of the Capitol Annex. Senator Joe Bowen, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Joe Bowen, Co-Chair; Representative Steve Riggs, Co-Chair; Senators Walter Blevins Jr., Ernie Harris, Stan Humphries, Christian McDaniel, Morgan McGarvey, R.J. Palmer II, Dan "Malano" Seum, and Damon Thayer; Representatives Julie Raque Adams, Ron Crimm, Mike Denham, Richard Henderson, Adam Koenig, Stan Lee, Brian Linder, Tom McKee, Michael Meredith, Jody Richards, Jonathan Shell, Arnold Simpson, Kevin Sinnette, and Rita Smart.
Guests: Representative Tommy Thompson; Ambrose Wilson, Michael Davis, Gary Peck, and Jack Coleman, Department of Housing, Buildings, and Construction; Richard Dobson, Department of Revenue; LaRue County Judge/Executive Tommy Turner; Mayor Jim Gray, Lexington-Fayette Urban-County Government; Mayor Greg Fischer, Pat Mulvihill, and Sara McGowan, Louisville Metro Government; Daviess County Judge/Executive Al Mattingly; Jason Bailey, Kentucky Center for Economic Policy; Shelley Hampton, Kentucky Association of Counties; Vince Lang, Kentucky County Judge/Executive Association; J.D. Chaney and Bert May, Kentucky League of Cities; Ron Wolf, Associated General Contractors of Kentucky; Prentice Harvey, Greater Louisville, Inc.; Marty White, Kentucky Society of Certified Public Accountants; Erik Jarboe, LearNet; Bryan Alvey, Kentucky Farm Bureau; Gay Dwyer, Kentucky Retail Federation; and Bob Weiss, Home Builders Association of Kentucky.
LRC Staff: Mark Mitchell, Joe Pinczewski-Lee, John Ryan, Jessica Causey, and Cheryl Walters.
Approval of Minutes
Upon the motion of Representative Crimm and a second by Representative Linder, the minutes of the June 19, 2013 meeting were approved.
Consideration of Referred Administrative Regulation
The committee considered referred Administrative Regulation 815 KAR 7:125, which establishes the basic mandatory uniform statewide code provisions relating to construction of one and two family dwellings and townhouses. Senator Bowen stated that a written report of the review will be submitted to the LRC.
Discussion of the Local Option Sales Tax
Mr. Richard Dobson, Executive Director of the Department of Revenue’s Office of Sales and Excise Taxes, explained the Streamlined Sales and Use Tax Agreement (SSUTA). SSUTA is a nationwide effort by 43 states, various local governments and members of the business community to develop measures to design, test, and implement a system that radically simplifies sales and use tax collection and administration by retailers and states. The Streamlined Sales Tax (SST) governing board administers SSUTA. The agreement became effective on October 1, 2005. 2001 HB 367 authorized Kentucky to participate in the SST project. 2003 legislation enabled conformity with SSUTA. Tax laws were refined to conform with SSUTA between 2005 and 2013. The first SST collection in Kentucky was in 2005. Since 2005, Kentucky has received $106.3 million in payments from SST vendors. In FY 2013, over 1,000 SST filers sent more than $20.7 million to Kentucky.
Regarding online sales and sales tax, 49.5 percent of consumers buy less merchandise online than in stores, 26.4 percent buy more online than in stores, and 24.1 percent buy the same amount online and in stores.
The agreement sets out requirements for administering the tax. The state must collect the tax. Notifications must be sent out for rate changes and boundary changes within a set time before the change takes effect. Rates and bases must be uniform in each taxing jurisdiction. Caps and thresholds cannot be used—such as establishing a maximum amount of tax that can be applied to a single purchase.
On May 6, 2013, the United States Senate passed the Marketplace Fairness Act (MFA) of 2013. The MFA of 2013 grants certain states the authority to require remote sellers to collect or remit sales and use taxes on sales to the state. The MFA of 2013 has been assigned to the House Judiciary Committee and the chairman is expected to announce House improvements to the Senate bill.
LaRue County Judge/Executive Tommy Turner said that the Kentucky Association of Counties endorses legislation supporting the local option sales tax. The local option sales tax would only involve the particular community which desires to enact it, which can be a particular city or an entire county. The citizens would, by election, choose to enact the provision. A sales tax with a maximum level of one percent would be collected as current sales taxes are collected. It is difficult to imagine a process that exemplifies democracy more than a local option. The citizens become intimately involved in the direction and growth of their community. While elected officials help provide vision, administration, and management, each individual citizen’s voice can be heard.
Some may view the local option sales tax as only a large city proposal that could only benefit Louisville, Lexington, and a small number of other cities in Kentucky. But it is much more encompassing, and the figures that have been generated for each county shows the tremendous potential each community holds. The local option sales tax is driven by those who live in a community, invest in the community, and make it stronger, thereby making all of Kentucky gain.
Lexington-Fayette Urban-County Government Mayor Jim Gray asked that the legislature allow citizens to vote and thus allow taxpayers a voice in whether they want the local option sales tax. The state cannot today afford to fund all local government needs. That's why cities and counties need to increase their revenues, but within limits. The tax would be for specific projects and then would sunset. The interest in the local option sales tax is creating jobs. Today, jobs go where the people are—where the people want to be and where the talent is attracted, which is why quality of life and place is important. The local option sales tax can benefit everyone and enjoys bipartisan support.
Louisville Metro Government Mayor Greg Fischer said that Kentucky can remain economically competitive in the 21st century by investing in its people and in its built environment. Oklahoma City invested $2 billion in capital projects and infrastructure using a local option sales tax. About $5 billion in private investment followed. Jacksonville, Florida built a new library, equestrian center, and preservation project, and made road improvements with a local option sales tax. The local option sales tax is not just for large communities. Norton, Kansas (population 2,908) built a new city pool with one.
Revenue tools currently available to Kentucky local governments are real and personal property taxes, special ad valorem taxes, occupational and business taxes, and insurance premium taxes. Kentucky needs options. The general fund has few new dollars. The three major components of employee compensation—pension, health insurance, and collective bargaining agreement wages—have cumulatively outpaced general fund revenue growth. There are very limited dollars for capital investments. Every locality in the Commonwealth is grappling with these challenges.
Local option sales taxes are common, which are collected in 37 states. All of Kentucky’s contiguous states except Indiana have this option. Virginia has a one percent local sales tax but no referendum is required. The tax has citizen input and is temporary. The local option sales tax would improve Kentucky’s quality of place to catch up with its competitors making Kentucky a place appealing for investment so our kids and grandkids choose to live and work here.
Citizen input is key in determining projects. Most communities using local option taxes engage their citizens through online input forms and community meetings. After a temporary local option sales tax is passed, a citizen advisory and oversight process is established to ensure those projects are moving forward appropriately.
Looking at local sales figures, the money a sales tax could bring in is considerable.
Food, medicine, residential utilities, and automobiles would be exempt from the local option tax. In order for the temporary local option sales tax to become a reality, citizens must be educated and informed, legislation must be passed, the Constitution must be amended, and localities must vote.
There is broad, bi-partisan support for the local option sales tax and endorsed by Republicans, Democrats, Independents, Governor Beshear, Kentucky League of Cities, Kentucky Association of Counties, the Metropolitan Alliance for Growth, which includes Louisville, Lexington, Northern Kentucky, Warren County, Daviess County, and Hardin County, media, and many business and civic leaders. Ballot initiatives are often successful because the citizens know where their money will go. The local option sales tax was recommended by two state study groups: the 2006 Task Force on Taxation and the 2012 Blue Ribbon Commission on Tax Reform. A poll conducted by the Courier-Journal showed 72 percent of the people when asked if they should have the right to vote on local projects, said "yes," 19 percent said "no," and nine percent were undecided.
The proposed ballot language would be as follows: “Are you in favor of amending the Constitution of Kentucky to allow cities, counties, consolidated local governments, urban-county governments, and other forms of merged city-county governments to submit to voters the choice of funding specifically identified projects with clearly defined costs, by the levy of a local sales and use tax, at a rate not to exceed one percent, the proceeds of which shall be deposited in a separate trust fund, to be used only for the specifically identified projects for a period of time approved by the voters?”
Daviess County Judge/Executive Al Mattingly spoke in support of the local option sales tax. The City of Owensboro and Daviess County are growing due to the citizens voting for a tax. By passing that tax, it was simply a third of a cent increase on the occupational tax. The City of Owensboro allowed the citizens to decide how that money was going to be spent. The local option sales tax is the way to reconnect local people with local government.
Mr. Jason Bailey, Executive Director of the Kentucky Center for Economic Policy, told the committee that local governments have challenges generating the revenue they need based on constitutional and statutory limits, property tax limits, limits on types of taxes local governments can levy, and limits on general revenue sharing. There is also the lack, in some communities, of a commercial and business base needed to make occupational and sales taxes viable, and loss of taxes due to industry declines. Kentucky’s property taxes are low. In 2009-2010, there was $21 in state and local property tax revenue per $1,000 in state personal income, which is 42 percent lower than the national average of $36, and ranks Kentucky 45th among states. Reliance on property tax is declining in Kentucky. Real property tax rates in Louisville and Jefferson County have fallen dramatically. There has been a 35 percent decline in Louisville and a 42 percent decline in Jefferson County since 1978. If Louisville and Jefferson County had just maintained the tax rate, it would have nearly $60 to 70 million more in revenues.
The sales tax is a regressive tax and even with exclusions, the poor pay more in sales and excise taxes as a percent of their income than others. The sales tax base is eroding in part because services are not included in the sales tax base. Other challenges with sales taxes in general include: that the tax is not deductible against federal taxes like an occupational tax and property tax; limited growth of sales tax revenue because it is not modernized; loss of state sales tax revenue because of border and consumption effects; it is not a solution for localities without a sufficient commercial or retail base; and has a problem with earmarking for specific projects.
Some context is needed to consider the local option sales tax. One thing is that the Blue Ribbon Tax Commission recommended the sales tax, but as a part of tax modernization and comprehensive tax reform which included sales taxes applying to services and a refundable state earned income tax credit to help offset the impact of a regressive sales tax on lower income people. Also, a proposal for the tax should not be seen as a swap or an offset or a reduction for another tax such as an occupational tax, as this may be seen as a shifting of responsibility from those who are most able to pay to those who are least able to pay.
Considerations for local tax reform would be: (1) a broad view of the issue of local taxation as well as state taxation should be taken; (2) tax fairness and revenue sustainability must be part of the conversation; a need to address the decline in the property tax; and (3) greater scrutiny and disclosure of tax breaks.
Senator Bowen said he was struck by the comment that the local optional sales tax is a very democratic process and extends to the citizens of local communities the opportunity to exercise that democratic process. Unfortunately, most of the options that are voted on are tax increases. Rarely seen is the opportunity extended to citizens to vote on eliminating or reducing a tax.
In response to a question from Senator McDaniel, Mayor Fischer replied that Oklahoma City has been used as the model and commented there were no cost overruns with their projects. In other words, if a project is a $40 million project and cost overruns are expected, it needs to be redesigned to come in at $40 million. Oklahoma City does not actually start the project until all of the money is raised.
In response to a question from Representative Denham, Mayor Fischer stated that, using Oklahoma City as the model, the citizens select about five to seven different projects in the community that have cross-demographic and cross-geographic appeal and put them on the ballot together. Some cities start bonding immediately and use the annual tax receipts for debt service. Other communities wait until 100 percent of the projects are funded before they even start.
In response to another question from Representative Denham, Mr. Bailey said that a small percentage of government raise their tax rates beyond the four percent level. Four percent may be a reasonable long term view, but when economies are doing well, it does not allow communities to benefit on the up-side and does harm on the down side.
In response to a final question from Representative Denham, Mr. Dobson said that in making a determination of whether or not to join the sales tax agreement, a state must evaluate the manner in which the agreement will affect their tax revenues positively or negatively.
Representative Lee commented that he has concerns about government getting more money. Voters are suspicious of government. The suspicion extends to government money going to private businesses. In response to a question from Representative Lee, Mr. Dobson replied that the market place fairness act would not create another federal bureaucracy. It just allows states to collect the tax on behalf of the local governments levying the tax on remote vendors. The streamlined sales tax agreement is a state organization. One of the key principals of the marketplace fairness act, as well as the streamlined sales tax agreement is state sovereignty. Mayor Fischer referred back to the poll he mentioned earlier and stated that the next question asked whether the person would vote for the project. He stated that 17 percent said "yes," 16 percent said "no," and 67 percent said their response would depend on the actual project. The object is to get the question on the ballot. People can always vote against it. Mayor Fischer noted that the length of Oklahoma's tax was due to successive five year approvals.
In response to a question from Senator Seum, Mayor Fischer said the entire one percent local option sales tax would be for the entire county; the tax is not “stackable.”
Senator McGarvey commented that by Mayor Gray and Mayor Fischer appearing before the committee together sets an example of people working across regional and political differences for the betterment of Kentucky. There is a new tone in Frankfort where the General Assembly is trying to work together to get things done, to better Kentucky. In response to a statement seeking clarification from Senator McGarvey, Mayor Fischer stated that Senator McGarvey’s understanding of the proposed amendment was correct in that the General Assembly is being asked to vote to give the citizens the right to vote.
In response to a question from Representative Adams, Mayor Fischer said that Louisville Metro Government’s overall tax burden in comparison with other cities’ rankings would not shift due to having a local option sales tax. This proposal would be separate from any other tax reform legislation unless it was included in a reform package.
In response to a question from Representative Crimm, Mayor Fischer said the one percent local option sales tax, as it is anticipated at present, would be used only for capital projects.
Senator Thayer commented that he has never had a constituent come to him and say they wanted to pay more taxes. Taxes lessen the ability of citizens to participate in a market-based economy. In response to a question from Senator Thayer as to the concern that more of a tax burden will be added to the citizens of Louisville, Mayor Fischer said he has not heard that as being an objection.
Senator Thayer noted that a right to work law could save project costs and free more money to make Kentucky more attractive to investment, and subsequently realize more money to the government.
Representative Riggs commented that he is concerned about people’s understanding of the local option sales tax. The total amount can be a fraction of a cent. The media has not reported that it is a temporary tax. The local option sales tax is an opportunity to keep money locally for possible tourism as was done in Tennessee. It is an opportunity for entrepreneurship.
In response to a question from Representative Shell, Representative Riggs answered that the local option sales tax would not be considered a special taxing district. The right to collect is given to the local government.
Senator Bowen added that he thought, conceptually, a local option sales tax is a fair process, but that wages have not kept up with inflation. To add another tax to people seeing their paychecks being eroded by inflation, taxes, and other issues that reduce their take home pay is of concern.
There being no further business, the meeting was adjourned at 12:05 p.m.