The 3rd meeting of the Task Force on Local Taxation was held on Friday, December 2, 2005, at 11:00 AM, in Room 131 of the Capitol Annex. Representative Charlie Hoffman, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Representative Charlie Hoffman, Co-Chair; Senator Damon Thayer, Co-Chair; Senator Denise Harper Angel; Representatives Steve Riggs and Arnold Simpson; R. T. (Tucker) Daniel, Tom Guidugli, Steve Hoskins, Vince Lang, Kevin Leonard, Bert May, Willie McElroy, Richard Tanner, and Bill Thielen.
Guests: Jamie Franklin, LRC staff; Commissioner Mark Treesh, Department of Revenue; Assistant Director Tom Crawford, Division of Local Valuation; Mr. Paul Coomes, Ph.D. Professor of Economics, University of Louisville.
LRC Staff: Pam Thomas, Charlotte Quarles, John Scott, Jamie Franklin, Donna Gaines, Mark Mitchell, Joe Pinczewski-Lee, and Sheri Mahan.
Representative Hoffman welcomed the members and asked them to introduce themselves to the task force. After the introductions, Representative Simpson moved that the minutes from the November 4, 2005 meeting be approved as written. The motion was seconded by Vince Lang. The motion carried by voice vote. Representative Hoffman then provided the members with an outline of the next task force meetings. He stated that the task force would start taking public testimony at the next meeting in April 2006.
Jamie Franklin of the Legislative Research Commission (LRC) provided the members an overview of mandates on local governments. She defined “mandate” for the members and provided examples of local mandates. She discussed the National Mandate Reform Act of 1995 which required analysis of legislation in the U.S. Congress. Kentucky enacted mandate legislation in 1982. This legislation required that introduced legislation be reviewed by LRC staff for local mandates. If the legislation meets the criteria for a “mandate” then staff prepares a local mandate statement which is attached to the bill.
Ms. Franklin provided the members with a list of local mandates affecting cities and counties. She discussed areas where city and county jurisdictions overlap and where mandates would affect both governing bodies. She stated that there are some mandates which affect only counties, which are jail and election costs.
Mr. Thielen asked how LRC staff determines the economic cost of a mandate. Ms. Franklin stated that once the mandate is identified, LRC staff analyzes the bill for financial cost. Sometimes information from outside agencies or organizations will be included in the analysis. Ms. Franklin then discussed the difficulties caused by scarce reporting by local governments in acquiring data for accurate analysis of proposed legislation.
Next, Commissioner Mark Treesh of the Department of Revenue and Assistant Director Tom Crawford of the Division of Local Valuation in the Department of Revenue provided on overview of the provisions of HB 44. Commissioner Treesh briefly discussed the history of HB 44, which was enacted in 1979. The bill was designed to limit property tax revenue increases at a time when property values were rapidly appreciating. The bill established a compensating tax rate, a 4% tax increase rate, and a maximum tax rate. Mr. Crawford defined the various rates. He stated that current law allows a taxing district to set a compensating tax rate and a 4% increase tax or a rate that will generate revenue growth in excess of 4%. However, any rate that will generate more than a 4% increase in revenue is subject to a recall petition. Finally, Mr. Crawford provided an example of a compensating tax rate calculation.
Representative Simpson asked if it is difficult to set a tax rate beyond the 4% since the enactment of HB 44. Mr. Crawford replied that it has been done, but not frequently.
Finally, Dr. Paul Coomes, Professor of Economics at the University of Louisville, discussed Kentucky’s economic competitiveness. Dr. Coomes discussed the role of state government in providing services to Kentucky’s citizens. He stated that Kentucky is much more state centralized in the provision of services as compared with other states. He stated that Kentucky needs to be decentralized and that the state government should only provide those services that local governments cannot supply, such as higher education and highway construction. He said that local governments need more economic development tools.
Dr. Coomes stated that Kentucky now has nine metropolitan areas and that six of these are located on the border with other states. He stated that businesses or residents in border areas can easily move across the state border if the taxes and services provided by local governments are better on the other side. He discussed the impact of no state income tax in Tennessee on the Hopkinsville/Clarksville metropolitan area.
Dr. Coomes discussed the concentration of fiscal resources at the state level. He stated that Kentucky has the seventh highest concentration of fiscal resources at the state level, with $8 billion at the state level and only $2.8 billion disbursed among local governments. He then discussed local option sales taxes, stating that Kentucky does not utilize this tool. Five of Kentucky’s bordering states and 76% of all local governments in the United States that have a sales tax use local option sales tax. He stated he believes that it is time for Kentucky to have a local option sales tax. This would not mandate local sales tax, but would instead allow local governments to use this tool for local development.
Dr. Coomes discussed the state and local tax burden on a typical family with $75,000 income for the largest cities in all 50 states. He stated that Louisville has the 11th highest tax rate nationally, and that every major metropolitan competitor to Kentucky is ranked lower than Louisville. He stated that the state income tax is the major contributor to this high ranking.
He discussed the high subsidization of about 100 school districts in Kentucky. Of the 176 school districts in the state, only 8 utilize an occupational tax to fund their school system. He also discussed the distribution of gas tax monies, stating that the least populated areas in the state receive the highest per person distribution from gas tax receipts. He discussed the “formula of fifths” and how it applies gas tax monies distribution.
Finally, Dr. Coomes provided suggestions on how to restructure Kentucky’s tax system. He gave the following suggestions: 1) lower the state income tax rate; 2) raise cigarette taxes; 3) suspend the HB 44 cap on property tax revenues; 4) require more matching money from local school districts; 5) overhaul the transportation revenue sharing formula; 6) stop the outflow of gaming money into other states; 7) privatize state resort park operations, and 8) amend the constitution to allow local option sales taxes.
Representative Riggs asked if all school districts would have the resources to provide matching money. Dr. Coomes replied that some school districts believe they do not have enough taxable real estate to provide matching money, but they ignore wages and salaries, which is a true tax base for many of these counties. Representative Riggs then asked if usage of a road should be taken into account when determining road fund distribution. Dr. Coomes stated that only 2% of Kentucky’s wages and salaries are coming from agricultural industries. Kentucky is no longer a rural, agriculturally-based state. He discussed the loss of manufacturing jobs in the state and increases in the service sector.
Senator Thayer asked whether reducing state income taxes could cause an increase in revenues to the state. Dr. Coomes replied that in general, higher state income taxes are the biggest obstacle to economic development in Kentucky.
Representative Riggs stated he does not believe that reducing personal income tax would provide the economic development windfall that some believe it could. Dr. Coomes replied that Kentucky does not have the advantages of other states that would allow it to keep the higher personal income tax rate.
Mr. Tanner asked what effect impact fees would have on counties with lower tax bases. Dr. Coomes stated that he is not in favor of impact fees and does not believes developers should have to pay for road improvements. Dr. Coomes also stated that he feels that Kentucky’s government is subsidizing citizens for living in rural areas. Mr. Tanner says that in some counties, such as Spencer County, most of it citizens are paying occupational taxes to Jefferson County and the monies are not returned to Spencer County. Dr. Coomes said that this is an example of how a lifting of the HB 44 cap would allow Spencer County to impose a higher property tax rate, increasing the county’s tax revenues.
Mr. Thielen asked if the local option sales tax is the best way to ensure that local revenues stay where they are generated. Dr. Coomes stated that in conjunction with a lowering of the state personal income tax, that yes, imposition of a local option sales tax is a good way to keep local tax revenues in the locality where they are generated. Dr. Coomes says that allowing local option sales taxes is the also the best way to provide the man-made amenities which are necessary to attract economic development to the state.
Representative Riggs stated that the developer who is charged an impact fee passes on that fees expense to those purchasing within the development. The impact fee is a way to ensure that those who cause an increase in local government services are those who pay for the increase in services.
Senator Harper-Angel asked what kind of fiscal impact a downtown arena for Louisville would have for the state. Dr. Coomes replied that he does not believe that the state should pay for Louisville’s downtown arena. He believes the state should provide basic infrastructure services for the state and the arena should be paid for by a local option sales tax.
Representative Simpson stated that he believes that Dr. Coomes would support the repeal of HB 44, but that this seems inconsistent with Dr. Coomes’ support of allowing localities to have local control in their taxing structure. HB 44 allows communities to vote for property tax increases and the repeal seems inconsistent with his support of local control. Dr. Coomes replied that HB 44 takes away local government flexibility.
Senator Harper-Angel asked staff to supply the members with a list of which cities and counties do not utilize the 4% property tax cap and what is the 5 year fiscal impact of the monies not being collected.
Representative Hoffman thanked those who testified. The meeting was adjourned at 1:15 p.m. A tape of the meeting and all meeting materials are available in the Legislative Research Commission library.