The 2nd meeting of the Task Force on Local Taxation was held on Friday, November 4, 2005, at 1:00 PM, in Room 131 of the Capitol Annex. Senator Damon Thayer, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Damon Thayer, Co-Chair; Representative Charlie Hoffman, Co-Chair; Senator Ernie Harris; Representatives Steve Riggs and Arnold Simpson; Glenn Caldwell, Tom Guidugli, Steve Hoskins, Vince Lang, Gary Larimore, Kevin Leonard, Bert May, Willie McElroy, Richard Tanner, Larry Whittaker, and Ellen Williams.
Guests: Dr. Barry Boardman, LRC staff; Dr. David Wildasin, University of Kentucky Martin School of Public Policy.
LRC Staff: Pam Thomas, Charlotte Quarles, John Scott, Jamie Franklin, Donna Gaines, Mark Mitchell, Joe Pinczewski-Lee, and Sheri Mahan.
Mr. Larimore moved that the minutes from the September 23, 2005 meeting be approved as written. Mr. May seconded the motion. The motion carried by voice vote.
Next, Senator Thayer discussed the results of the member survey. He stated that he top two responses to the question "What are the two most important issue that the task force needs to address?" were that local governments need more flexibility in creating a tax system that fist the needs of the local government, and the conflict between cities and counties over the existing tax base, especially regarding the occupational tax. He also said that members identified the biggest obstacles to the success of the task force as being "turf battles" and the need to pass a Constitutional amendment to enable needed local flexibility. Members also identified a lack of political resolve on the part of the legislature to make changes and public misunderstanding of what the problems really are. Also Senator Thayer noted that members responded to the request for recommendations relating to what services should be provided by cities and what services should be provided by counties, and recommended that the consolidation of special service districts should be encouraged as much as possible.
Senator Thayer then made mention of a comment by Mayor Guidugli in his response to the survey. Mayor Guidugli suggested that we the task force should begin its deliberations by pretending that the existing Constitution and statutes do not exist and that the task force should ask itself what the "perfect" local tax system would look like if could be created from scratch. This system should be what the task force strives to achieve.
Senator Thayer then introduced the tow speakers for the meeting: Dr. David Wildasin with the University of Kentucky Martin School of Public Policy and Dr. Barry Boardman, LRC staff economist. Dr. Boardman discussed the composition of Kentucky’s local government revenues. Dr. Boardman provided an overview of the data used in his analysis and defined the term "local government". He stated that his analysis is representative of an average local government.
Dr. Boardman outlined the composition of Kentucky’s local government revenues for 2002 as follows: 39.1% state intergovernmental transfers, 18.3% property tax, 9.7% occupational income tax, 2.4% public utility and other select taxes, 3.0% motor vehicle tax, 14.3% fees and charges, and 13.3% other. He then outlined Kentucky’s state and local tax revenues by governmental type for 2002 as follows: 74% state, 11% school districts, 8.6% cities, 5.2% counties, and 1.3% special districts.
Dr. Boardman then compared Kentucky’s tax structure to the rest of the country. He stated that Kentucky tends to raise more of its state and local revenue at the state level as compared to other states. He then compared Kentucky’s percent of local taxes with other states. He stated that Kentucky’s property tax percentage is significantly lower, at 54.9% as compared to the average for the rest of the country of 72.9%. This difference between Kentucky and the nation's local government tax structures has steadily been increasing over the past 30 years, making Kentucky’s local tax structure increasingly different from other states. He stated that currently local property tax represents about 30% of local government’s efforts to raise revenues.
Dr. Boardman then discussed areas where Kentucky’s local tax structure makes up for the low property tax rates in the state. He stated that the analysis showed that most local governments are making up the difference with local user fees and interest on revenues.
Next, Dr. Boardman discussed the use of occupational taxes to raise local revenues. He stated that about 1/3 of the cities and 1/3 of the counties are utilizing this type of tax. It has become an important revenue source for some city governments.
In conclusion, Dr. Boardman noted that Kentucky’s local governments generate a smaller percent of total state and local taxes than the national average. They rely far less on property taxes than the national average. User fees and other non-tax revenues are an important revenue source for local governments in the state. Occupational taxes are an increasingly important source of revenue for cities in the state.
Senator Harris asked if staff could provide the members with data analysis that would show the effects that raising local property taxes closer to the national average would have on other taxes.
Judge Whitaker stated that in some cases an increase in property tax would raise less revenue than would implementation of an occupational or insurance premium tax.
Senator Thayer asked Judge Whitaker what tax structure would work best in his county. Judge Whitaker replied that insuring that revenues are returned to the counties from the state intergovernmental transfers in a more timely fashion.
Senator Harris asked for staff to provide an accounting of unfunded mandates imposed upon local governments. Senator Thayer stated that could be an agenda item at the next task force meeting.
Senator Riggs stated that he does not believe that state centralized distribution of tax revenues is the most efficient way to provide revenue to local governments in Kentucky.
Representative Simpson asked if staff could provide information to the members regarding how other states allow their local governments to implement and collect taxes.
Next, Dr. David Wildasin from the University of Kentucky discussed the elements of a good local tax system. He discussed the basic principles of a good local tax system, which has two important criteria. He stated the system much first be efficient with no distortion of economic incentives. Second, tax systems should be equitable. The tax burdens should be distributed fairly among all those in the taxing jurisdiction.
Dr. Wildasin further discussed tax efficiency. He stated that economic decisions should be guided by real economic benefits and costs, not fiscal incentives. Economic efficiency depends on the rewards structure, including taxes, expenditures and regulatory policies. Local fiscal policy, residential location, local investment, and the provision of public services all influence where business activity is located.
Dr. Wildasin stated that the challenge is to adequately define what is equitable in a locality. There are several concepts that weigh into deciding what is equitable, such as the ability to pay principle, the benefit principle, and the concepts of horizontal and vertical equity. He stated that simplicity, transparency, accountability and enforceability are important elements of a good local taxation system.
Next, Dr. Wildasin discussed the fundamental issues for local finance. He discussed the issues surrounding local autonomy and the regulation of local property taxes. He stated it is important to decide which duties should be assigned to lower level governments and which to state government. He noted that it is also important to determine which taxes are to be used by each level of government. Dr. Wildasin then discussed the pros and cons of local autonomy.
Next, Dr. Wildasin discussed local taxation in Kentucky. He sated that property tax is an important local revenue source. HB 44 limits local tax property growth to 4% annually without the possibility of recall. HE noted, however, that few counties appear to be limited by the 4% cap as most do not levy beyond the compensating rate. He stated that perhaps some provisions of HB 44 have resulted in Kentucky’s relatively centralized fiscal structure. He then stated that the repeal of HB 44 might result in the rebalancing of state and local tax structure, possibly reducing the reliance on state government and providing more local autonomy. Dr. Wildasin discussed the importance of data collection regarding local taxation in the state and recommended possible improvements in this regard.
Dr. Wilasin next briefly discussed local occupational taxes and local corporate income taxes. He also discussed the state control of these local tax issues.
Finally, Dr. Wildasin discussed future possible federal and state fiscal reforms. He discussed possible future federal and state tax changes and their possible effects on local tax revenues.
Senator Harris discussed the possibility of allowing local governments to receive 2% of the state sales tax or a portion of state income tax. Mr. May stated that it is constitutionally prohibited for local governments to share in the state sales tax.
Representative Riggs asked if there are uniform local tax rates for school financing in other states. Dr. Wildasin said there is substantial variation between the states in the financing of their school systems, with some having more state revenue contribution than others. Representative Riggs then asked if most states have caps on their local property tax rates. Pam Thomas replied that several states have caps and limitations on their property taxes and the trend has been towards more states imposing limitations. Also, there is a trend towards overall caps on overall spending and revenues for state governments.
Senator Thayer stated that it would be beneficial to have more information presented in regards to the effects HB 44 has on local government taxation. Also, he stated that more information regarding unfunded local mandates and the possible effect of allowing local governments to keep more revenues at the local level would be beneficial.
Representative Simpson discussed the possibility of allowing urban communities to keep more revenues at the local level. He also discussed the idea of allowing communities to keep more of the tax revenues that are generated there, such as allowing wet counties to keep a portion of the alcohol tax.
Senator Thayer stated that the next task force meeting will be held on Friday, December 2, 2005 at 11:00 a.m. in room 131 of the Annex.
The meeting was adjourned at 3:10 p.m.
All meeting materials and a cassette tape of the meeting are available in the Legislative Research Commission library.