The Task Force on Local Taxation met on Thursday, April 13, 2006, at 10:00 AM, 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; Senators Denise Harper Angel and Ernie Harris; Representatives Steve Riggs and Arnold Simpson; Glenn Caldwell, R. T. (Tucker) Daniel, Tom Guidugli, Vince Lang, Gary Larimore, Bert May, Steve Robertson, Richard Tanner, and Bill Thielen.
Guests: Dan Waits and Rich Ornstein, Governor's Office for Local Development; Sylvia Lovely and Neil Hackworth, Kentucky League of Cities; Larry Crigler, Kentucky Association of Counties; Shellie Hampton, Kentucky County Judge/Executive Association; Honorable Bill Drury, Chairman, Kentucky Magistrates and Commissioners Association.
LRC Staff: Pam Thomas, Charlotte Quarles, John Scott, Jamie Franklin, Donna Gaines, Mark Mitchell, Joe Pinczewski-Lee, and Sheri Mahan.
Mr. Tanner moved that the minutes from the December 2, 2005 meeting be approved as written. Mr. Lang seconded the motion. The motion carried by voice vote.
Senator Thayer introduced the recently appointed Commissioner Steve Robertson of the Governor's Office for Local Development.
Senator Thayer briefly discussed the May 11, 2006 meeting in which the task force will hear testimony from concerned parties regarding local taxation. This meeting is to be held in Frankfort and further details will be forwarded to member in future meeting notices.
Mr. Dan Waits and Mr. Rich Ornstein of the Governor's Office for Local Development (GOLD) discussed general local taxation issues and the function of GOLD. Mr. Waits discussed the duties and responsibilities of the State Local Finance Officer and the State Local Debt Officer. Mr. Waits then provided an overview of mandated financial reporting by counties. Counties are required to submit to GOLD their quarterly financial reports and annual budgets, and sheriffs and clerks quarterly financial reports and annual budgets. Counties are also required to submit a Uniform Financial Information Report (UFIR) on an annual basis. GOLD provides technical assistance to counties, providing one on one assistance and workshops for newly elected officials.
Mr. Waits next discussed the information that cities are required to report to GOLD. Cities of the 1st through 5th class are required to file annual audits with GOLD. Cities of the 6th class may file bi-annual financial statement. All cities are required to file a City Uniform Financial Information Report (UFIR) annually, and this information is entered into a database maintained by GOLD. Mr. Waits stated that GOLD also serves as the inventory keeper for special districts throughout the state. GOLD has on file notifications of creation, special district audits/financial statements, special district budgets, and special district UFIRs (for taxing districts). He also outlined the oversight responsibilities for GOLD and discussed the differences between city, county and special districts.
Mr. Waits gave an overview of recent efforts by GOLD to increase financial reporting compliance. These include conducting a special districts inventory, increasing the local government advisor staff, working with Kentucky.gov to make all financial reporting web based, creating a special districts manual, revising the SLFO manual, and working with the Kentucky League of Cities to stress the need for compliance.
Finally, Mr. Waits updated the committee regarding special districts. There are currently 1,400 special districts, 760 of these are taxing districts. There are 43 unique types of special districts. County clerks are responsible for certifying the special districts in their county, keeping an accurate inventory, and maintaining information about that district. The lack of a centralized oversight or registration point makes it difficult for the state and GOLD to accurately analyze these taxing districts.
Representative Riggs discussed county clerks and their needs to be able to track and maintain information regarding special districts.
Senator Harris asked if most of the administrators of special taxing districts are appointed officials. Mr. Waits replied that yes a majority are appointed. Senator Harris asked what difficulties would be encountered if every rate increase by a taxing district was required to be approved by local fiscal courts or cities. Mr. Waits stated that he believes that there should at least be one central identifying point, but he is unsure if taxing districts can be required to receive approval under the current statutes.
Representative Riggs stated that he believes there should be closer oversight of the uses of taxing district increases. Senator Harris suggested that possibly special taxing district could be required to report annually to the local fiscal court as to the usage of their revenues.
Representative Simpson expressed his concerns regarding non-elected officials spending public moneys.
Senator Harper-Angel asked if it is true that seventy percent of counties are not collecting all the property tax that they could under HB 44. Mr. Waits replied that yes, on real property tax seventy percent did stay at the compensating rate, while only thirty percent took more than that rate. Some local governments do not take the full four percent, but a lesser percentage.
Next, Ms. Sylvia Lovely and Mr. Neil Hackworth of the Kentucky League of Cities (KLC) discussed tax structure problems and fiscal issues facing Kentucky city governments. Ms. Lovely discussed the issues facing cities over the next 50 years. She emphasized the importance of local self-determination and local decision making.
Mr. Hackworth gave an overview of some of the financial difficulties facing cities. He stated that city revenues are not keeping pace with required expenditures, such as retirement contributions and insurance for workers. The lack of diversification of tax sources has led to excessive reliance on other available tax options, such as the insurance premium tax. He said that the lack of diversification is caused by constitutional limits on the authority of the General Assembly to grant cities different types of taxing authority. Also, statutory limits preempt local decision-making and prevent local officials from making use of certain tax options.
Mr. Hackworth stated that tax base conflicts exist between cities and counties with respect to the occupational and insurance premium tax base because of mandatory credit requirements. Complexities in the current tax system cause revenue instability and losses. This is particularly true regarding the insurance premium tax. Tax bases are being eroded by aging populations and technological innovations decreasing the size of the labor force. Mr. Hackworth discussed statutory limitations that decrease needed flexibility in local tax structure and elimination local decision making authority. He discussed the limits imposed by HB 44, limits on restaurant taxes and limits on transient room taxes.
Representative Simpson stated that HB 44 does not preclude any local government from raising taxes. Local governments are allowed to raise taxes above the HB 44 limits however increases in excess of four percent are subject to voter recall.
Representative Hoffman asked if the KLC has data regarding how many cities have taken the four percent and what the potential catch up would be for cities that have not taken advantage of the full four percent. Mr. Hackworth replied that the KLC would gather the data regarding which cities took the compensating rate as opposed to the four percent and provide that information to members.
Next, Mr. Larry Crigler of the Kentucky Association of Counties reviewed county tax structure and current mandated county functions. He discussed the conflicts that exist between cities and counties with respect to the occupational and insurance premium tax mandatory credit requirements. Counties are confined to three forms of taxes, which are property, occupational, and insurance premium taxes which limits the revenues raised. Local mandates, such as cost of elections, jails, emergency services, and county public defenders, require compulsory expenditures on counties. He stated that counties can not keep up with the mandated demands under the current tax structure. He suggested that the legislature might introduce legislation encouraging tax sharing between counties and cities of the occupational and insurance premium taxes. Mr. Crigler made suggestions as to the provisions of this type of legislation.
Representative Riggs asked what is prohibiting local governments from using interlocal agreements to accomplish tax sharing. Mr. Crigler replied that more specific guidelines would help facilitate the process and encourage local governments to utilize the process.
Representative Simpson asked if smaller counties are having the most difficulty meeting their financial obligations. Mr. Crigler said that yes smaller counties are have more difficulty, but this answer is not based on any statistical data.
Senator Thayer suggested that city/county mergers might be a possible solution to tax sharing issues.
Next, Ms. Shellie Hampton of the Kentucky County Judge/Executive Association discussed the real estate transfer tax. She stated that currently when a real property deed is transferred a tax of fifty cents is assessed per $500 of value to the seller by the county clerk. This money is remitted to the county treasurer and the county clerk retains five percent of the total tax collected. Ms. Hampton stated that the Association suggests the tax be raised to two tenths of one percent. Also, they suggest that counties with no occupational taxes in place should be allowed to implement a fee of $3 per $500 of value on deed transfers.
Senator Harris asked if the real estate transfer tax is paid on ever transfer, such as transfers between parent and child. Ms. Hampton replied that there are exemptions from the tax.
Finally, Mr. Bill Drury, Spencer County magistrate and chairman of the Kentucky Magistrates and Commissioners Association, discussed impact fees. Mr. Drury discussed the effects of HB 44 on counties and illustrated this by discussing Spencer County. He stated that Spencer County has taken the four percent rate increase on property tax at every opportunity. Spencer County also tried to impose an insurance premium tax, which failed. The county's fire taxing district has tried to increase their taxing rate, which has been challenged in court. High growth counties are effected most severely due to increasing strains on county infrastructure and inability to raise tax rates or implement new taxes. Counties need flexibility to increase taxes and implement fees. He suggested that a grant pool be set aside for the highest growth rate counties to supplement emergency and other public services. Also, he discussed impact fees. Impact fees have become a way for counties to supplement their tax base by charging these fees to developers for impacting county infrastructure.
Representative Riggs discussed possible ways to assist high growth counties in keeping up with increasing demands on their infrastructure. He stated that high growth counties especially need flexibility in taxing options to maintain services and assist in future growth.
Senator Harris asked if impact fees are constitutional. Mr. Thielen stated that if the impact fee is properly structured and imposed then yes they are constitutional.
Mr. Larimore commented that utilities struggle to provide infrastructure in high growth counties. He stated that several cities and counties are discussing the possibility of implementing system development fees to help pay for system increases and improvements.
Senator Thayer stated that the next meeting will be held in Frankfort on May 11, 2006. This meeting will provide an opportunity for public testimony. He suggested that members encourage testimony.
Senator Thayer thanked those who testified. The meeting was adjourned at 12:10 p.m. A tape of the meeting is available in the Legislative Research Commission library.