The 2nd meeting of the Task Force on Local Taxation was held on Thursday, May 11, 2006, at 10:00 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: 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, Bert May, Willie McElroy, Richard Tanner, and Bill Thielen.
Guests: Mayor Brad Collins, Morehead, President KLC, Mayor Bill Paxton, Paducah, Mayor Tom Watson, Owensboro, Chris Derry, Bluegrass Institute, Mack Bushart, Executive Director , Kentucky Property Valuation Administrator's Association, Captain Bradford Michel, Jefferson County, Steve Stevens, Senior VP of Public Affairs, Northern Kentucky Chamber of Commerce, Robert Horine, County Administrator, Campbell County Fiscal Court, Scott Kimmich, Deputy Judge Executive, Kenton County Fiscal Court, Greg Engelman, Finance Director, City of Newport, Ken Warden, Warden & Associates Realtors.
LRC Staff: Pam Thomas, Charlotte Quarles, John Scott, Jamie Franklin, Donna Gaines, Mark Mitchell, Joe Pinczewski-Lee, and Sheri Mahan.
Senator Thayer moved that the minutes from the previous meeting be approved as written. Second by Mr. Thielen. Motion carried by voice vote.
Representative Hoffman welcomed the members and those interested in testifying. He outlined the procedure to be used during the meeting for public testimony. Also, he briefly discussed the task force report and the process that will be used in deciding what recommendations the task force will make to the LRC.
Mayor Bill Paxton of Paducah opened the public testimony, discussing tax modernization and the restaurant tax. He stated that Paducah is interested in being a destination point for tourism and increased revenues are imperative to accomplish this goal. The restaurant tax is a local option, but currently smaller cities can utilize the tax but larger cities cannot, which Mayor Paxton believes to be unfair. Mayor Paxton noted that restaurant taxes are imposed across the country and that people have become accustomed to paying this type of tax. He stated that if allow to levy this tax, Paducah would use the revenue from the tax to float a bond issue to build soccer fields, biking and jogging trails, baseball fields, and city park improvements. Mayor Paxton said that while he supports tax modernization, it has become more difficult for the state to get money to the cities. Allowing larger cities to levy of a restaurant tax may grant cities more control their own destinies.
Mayor Paxton then read from a letter written by Mayor Elaine Walker of Bowling Green. In the letter, Mayor Walker discussed cities of the second Class, noting that cities need more funding options to stabilize local government budgets. She also noted in the letter that current taxing sources are insufficient, and that a restaurant tax or small local option sales tax would be a viable solution.
Representative Riggs asked Mayor Paxton to respond to the statement that constituents could not afford to pay more at McDonalds if a restaurant tax was imposed. Mayor Paxton replied that everybody has an opinion on this, but this tax is being used successfully in other places. Right now the pubic pays a 7% tax at hotels and motels without complaint, and he does not believe that constituents would complain about a restaurant tax. He stated people can afford this tax and that people will be willing to pay the tax to have a better community.
Representative Riggs then asked if Mayor Paxton believes that a restaurant tax would incent restaurants to move outside the city line. Mayor Paxton replied that it would take a substantial capital investment to complete that kind of move. Also, large chain restaurants are already paying this tax in other states and they have not been discouraged from locating in areas with restaurant taxes. Mayor Paxton stated that he is aware of concerns and will take them into consideration, but that mayors must be permitted some control their city's destiny. Elections will be the check on the decisions that are made.
Senator Thayer asked Mayor Paxton whether his proposal would allow all cities no matter what class to be permitted to enact a restaurant tax by local option vote. Mayor Paxton replied that he supports the General Assembly giving councils the authority to implement a local tax if they so chose, rather than requiring a local option vote. He noted that it is the job of the mayor and city commission to do what is best for the community, and that every tough decision that comes by cannot be put up for a referendum. Mayor Paxton stated that he believes it should be a council decision. Senator Thayer responded that personally he could only support a restaurant tax if it was subject to the vote of the people at a regular election.
Mr. May stated that his hometown has a restaurant tax and the existence of this tax did not stop the development of restaurants.
Mr. Thielen commented that cities and counties are forced to look at solutions like this in the absence of broader based solutions that cannot be considered because of our Constitution.
Mr. Tanner stated that if counties were given the authority to levy this tax as well, then the issue of restaurants moving outside of the city could be a moot point.
Next, Mr. Steve Stevens of the Northern Kentucky Chamber of Commerce introduced a group representing that area. He stated that in the Northern Kentucky area communities have differing tax policies and issues which makes it difficult for interlocal cooperation. The system is burdensome for taxpayers and for local governments, and that both suffer under this lack of flexibility. Mr. Stevens noted that the Chamber facilitated discussions between local governments and business interests and that the issues they will be presenting are those that have arisen most consistently during these meetings.
Mr. Greg Engleman, the Chief Financial Officer of the City of Newport discussed revenue sharing and sales tax issues. He noted that the tax base for cities and counties overlap which creates competition for same tax base. The overlapping bases create confusion among taxpayers especially in northern Kentucky because of the number of cities. Mr. Engleman proposed that local governments be permitted to levy a local option sales tax, which could be used to reduce occupational licenses on businesses. In lieu of the local option sales tax, Mr. Engleman recommended a general revenue sharing situation from the state sales tax. He also proposed a constitutional amendment that would allow the General Assembly to create a new, more flexible taxing system to address many of the local financing issues.
Mr. Ken Warden, a real estate broker from northern Kentucky, addressed the task force regarding occupational license fees. He stated that the northern Kentucky area has 54 different communities competing for revenues. A small business person must deal with each individual community separately to do business in the area. He said that there are so many taxes and forms because of the different tax bases of the communities and that in some cases he pays more to have forms completed than he pays in taxes. He recommended that the system be made fairer and simpler. He said that counties and cities should be allowed to work together to collect the tax at one central location with a uniform tax base. This would allow some counties and cities to collect revenues that may not be collected at present. Mr. Warden suggested that Counties could act as central collection point and that revenue would be distributed to the cities where revenue is earned. This would eliminate complications that exist under the current system.
Mr. Scott Kimmich, the Chief Financial Officer of Kenton County, discussed local option taxes, special levies, and the ability to assess for services. Mr. Kimmich stated that forty cents of every dollar collected from real property goes to run the Kenton county jail. He recommended that the state consider local options or special levies to allow county governments to go onto the ballot for special projects or programs. He noted that when a county takes the four percent, a duplicative tax can be created if a resident lives in both the city and the county. He stated that public participation is key to the success of local levies. He also noted that cities and counties both should be allowed to assess for public services in local service tax districts established by elected officials.
Mr. Robert Horine, County Administrator for Campbell County, discussed funding for 911 services. Mr. Horine discussed the need to develop new ways to fund 911 emergency telephone services. He stated that when 911 was first established in the 1980’s there was a good funding mechanism, which was a fee on land line telephones. What has happened since then is that land line technology is being replaced by cellphones and voice over internet protocol services. He said that most 911 centers are still funded by the fee on land line services, and with the change in technology the revenue stream is going away. Many counties are faced with no option other than increasing the fees on the land line because of the constantly shrinking base. Mr. Horine suggested that the state allow local jurisdictions to asses a fee on wireless telephones being utilized in that jurisdiction. He also suggested increasing the state fee on telecom providers, and using the proceeds to fund the 911 centers. He also suggested allowing a local option dedicated property tax to replace 911 fees on land lines.
Mr. Stevens recommended another way to help local revenues is to not add new construction to property tax base for three years. He noted that this suggestion was mentioned in regional discussions.
Senator Thayer asked Mr. Kimmich if there would be a manpower cost if counties became collection agent for occupational taxes, and how difficult would it be to implement such a system. Mr. Kimmich replied that counties currently collect for many cities, but the primary issue is that the tax base is different. If counties were allowed to levy on a broader base, then the collections could be done more easily. Kenton County currently collects taxes for all cities within the county except Covington and Elsmere. Even though there is a centralized collection point, each city has separate forms so the process is still complicated. Mr. Kimmich suggested that the state give counties and cities the ability to set a uniform rate through an interlocal agreement and that the county be permitted compensation for collecting and distributing the taxes. One possibility would be to pay the county for state time served by inmates housed in county jails, which would help relieve local burdens.
Mr. May stated that the city and county where he is from each has the one percent tax and the credit applied. They have an interlocal agreement where the county collects all taxes and revenues are split on a 60/40 basis. The year before this agreement the city collected $438,000, and the year after the interlocal agreement the city received $579,000 for the 40% share. He stated that the increase was attributed to capturing revenues gained by receiving payments from people who previously claimed to paying the other jurisdiction.
Mr. Thielen stated that cities and counties are losing revenue because the taxes aren’t collected uniformly, ordinances are inconsistent and taxpayers don’t know how to get their taxes paid.
Next, Mr. Chris Derry of the Bluegrass Institute discussed economic development in Kentucky. Mr. Derry discussed trends outside of Kentucky, stating that over the next generation he believes that by securing property rights and reducing the tax burden Kentucky can be a destination of choice for entrepreneurs. To illustrate his idea, Mr. Derry presented three stories to the task force. First, he discussed an industrial park near Portland which is drawing in new jobs to the region. He said that when communities have more control, they can more effectively compete.
Next, Mr. Derry discussed the case of New Jersey. Fifty years ago New Jersey was a small "bedroom community" for New York City. Slowly businesses spread into the state, but recently businesses are leaving New Jersey in droves. He stated that this story illustrates that Kentucky is in competition with every other state and more competitive and attractive we become to entrepreneurs, the more jobs we can attract to the state.
Mr. Derry's third story was about the kind of city that is coming in the near future. He discussed Sandy Springs, Georgia, which held a referendum on whether citizens could establish an incorporated city. Ninety-six percent of the voters were in favor of incorporation. The city structure proposed is unique in that there would only be three employees to run the city, and all city services will be privatized rather than creating a city bureaucracy. He said that several other cities are including similar initiatives on local ballots.
Mr. Derry agreed with Senator Thayer that if local option sales taxes are permitted, there should be a reduction is state income taxes so that taxpayers are not burdened any more than they are today. Mr. Derry stated that he believes the AMC should be abolished. He noted that because all politics are local, taxation should be local as much as possible so individuals have ability to express opinions and offer options. He stated that he agrees with the idea of popular referenda. This requires cities that want a local option tax to put budget and expenditures on line and creates additional transparency.
Senator Thayer asked Mr. Derry for his opinion on some of the testimony heard in this morning. Mr. Derry stated that he is in agreement with the northern Kentucky local option sales tax idea with a reduction in the state sales tax. He believes this will reduce pressure on legislatures and put more pressure on local elected officials.
Senator Thayer asked for Mr. Derry's opinion about sunset provisions on local option funding provisions. Mr. Derry said he believes sunsetting is the appropriate way to serve a public need and then to reduce the tax once the need is fulfilled.
Senator Thayer then asked if local officials are voted in by citizens to make decisions. Mr. Derry replied that in Bowling Green, the previous mayor and local commission passed several local fees which were the stimulus for him creating the Bluegrass Institute because there was no local voice. Eventually they all lost their jobs and now the tax are being reduced. Mr. Derry said cities and counties need balance, and mayors should have some responsibility but they should not be permitted to run amok. Local option sales tax would be a balancing act to allow the local mayor to approach his/her constituents for funding.
Mr. Thielen stated that in order have a local option sales tax, which could be structured in many ways, there first must be a constitutional amendment. He asked Mr. Derry if he and his institute would campaign for the amendment. Mr. Derry replied that the Institute is a 501(c)(3) and unable to advocate any specific position, but can provide information and educate the public.
Addressing the issue of privatization, Representative Riggs discussed the Mayor of Indianapolis who won a national award by privatizing the water company, saving the taxpayers a lot of money. He stated that two years later, it was discovered that the private company providing the services was releasing toxic chemicals into rivers and the reason they did that was to save money. Representative Riggs noted that contracting can work but there are other situations where it does not work. Mr. Derry agreed with Representative Riggs and noted that services will only be as good as the underlying contract. He stated that the challenge for any local governments to initiate a contract with all of the necessary protections because they don’t often have all of the information they need. Privatizing sometimes work and sometimes does not but he still believes that services should be put up for bid so the best price can be obtained.
Next, Mayor Brad Collins of Morehead discussed implementing restaurant taxes. He provided an overview of the experience of Morehead. He state it took four years to get the support to pass a three percent restaurant tax, but it was finally passed. The restaurant tax in Morehead has been in place four years, and the tax brought in $560,000 its first year, and last year $780,000. The revenues from the tax are used strictly to attract tourism, and have funded a new soccer stadium, baseball field remodeling, and helped Morehead State and Rowan County High School with various projects. The newly completely conference center was funded one hundred percent with restaurant tax funds. Mayor Collins stated that the restaurant tax has been a huge success in Morehead and this option should be extended to all classes of cities. Mayor Collins recommended the task force suggest amending Section 181 of the state constitution to create a better local tax system, enact tax base sharing legislation to allow cities and counties to voluntarily share revenues based upon the delivery of services, and give local governments more tools and options in raising revenues.
Mayor Giduli asked if the restaurant tax would be as important if cities and counties were able to share the state sales tax. Mayor Collins replied that most states have a restaurant tax already. He likes the idea of a restaurant tax in counties as well.
Mayor Tom Watson of Owensboro discussed his view on local taxation. He stated that he agrees with almost everything that has been said today about local options. He said he is concerned about how cities will be able to continue to participate and fund their employee retirement systems. He stated that is may be time to change from defined benefits to defined compensation for employees. If this change is not made, services will have to be reduced to meet the obligation. He stated that the state should consider local option to meet the needs.
Next, Captain Bradford Michel from Jefferson County discussed special districts. Captain Michael is a student in program which requires him to do fire related research, and he has met this requirement by researching the tax structure for fire protection districts. He then discussed his findings, which included a method for computing tax rates for fire protection districts. He stated that the tax regulations have not changed in over 62 years but costs have grown rapidly. Many fire protection districts are in danger of not being able to continue their current level of service, because of the changing duties of fire protection services. He said that the mission of fire service has changed over time and now includes technical rescue, hazardous materials and homeland security as a part of the fire response system. Currently emergency medical services calls account for over one half of all emergency call volume. Captain Michael recommend a move towards a performance based tax structure, which would allow local communities to decide the level of protection they desire, to determine reasonable costs for providing that level of protection, and specific and measurable criteria that must be met. Controls should be implemented to address special taxing district accountability including meeting national standards and fiscal and operational auditing to ensure that districts maintain high standards. Captain Michael stated that although the maximum rate of 10 cents per $100 of value has not been changed since 1944, fire departments should be required to detail the improved services they will provide for any additional tax increases.
Representative Hoffman asked who would be the determiner of the need or performance level. Captain Michael responded that the state fire commission would verify that the local dept was performing and operating in accordance with standards.
Finally, Mr. Mack Bushart, Executive Director of the Kentucky Property Valuation Administrator's Association, addressed the task force regarding how county PVAs are funded and how this impacts local governments. Mr. Bushart stated that PVA funding is provided through General Fund Appropriations, which must all be used for personnel. These funds have been increasingly supplemented over the past several years by requiring PVAs to submit a portion of their locally collected revenues to the state. Local funds provide all of the support for operating the office, and these funds are generated in part through fees paid by local governments for use of the tax rolls. He said that the funding formula was established in 1942 and has not been amended since that time. He stated that his proposal is for increased funding for PVA offices through identifying fixed funding stream based upon a dedicated portion of the state real property rate. He noted that without increased funding, the PVA offices will not be able to assess property as effectively, which could impact local revenues.
Senator Harper Angel asked what percent of local revenues have to be sent back to the state to fund personnel. Mr. Bushart responded that last year it was forty-four percent.
Senator Harper Angel informed the task force that she filed a bill during the 2006 Regular Session to dedicate the state rate as proposed by Mr. Bushart. She said that if the PVAs do not receive at least baseline funding for staffing, county PVA offices will need to be shut down. Senator Harper Angel said that she hopes the task force considers recommending to allocate a portion of the rate to PVAs, or at least recommend that a new review of parcel counts be initiated.
Representative Hoffman thanked all those who testified. He stated that the next task force meeting would be held on June 6th in Frankfort.
There being no further business, the meeting was adjourned at 12:30 p.m.
A tape of this meeting in its entirety is available in the Legislative Research Commission Library.