Importance of Kentucky local government Importance of Kentucky local government
Local governments have challenges generating the revenue they need h h d • Constitutional & statutory limits Constitutional & statutory limits – Property tax limits – Limits on types of taxes they can levy yp y y – Limit on general revenue sharing • Other issues Other issues – Role of business tax incentives – Lack of a commercial & business base needed to make occupational & sales taxes viable – Loss of taxes due to industry declines
Kentucky’s property taxes are low Kentucky s property taxes are low State and local property • $21 in state & local $21 in state & local tax revenue per $1 000 in tax revenue per $1,000 in personal income (2010) property tax revenue per $36 $1 000 in state personal $1,000 in state personal income (2009 ‐ 2010) • 42% lower than US • 42% lower than US $21 average of $36 • Ranks Kentucky 45 th k 45 th R k K among states United States Kentucky Source: Computed from Census Bureau Census of Governments
Real Property Tax Rates in Louisville/Jefferson County Have Fallen Dramatically C H F ll D i ll 35% d 35% decline in Louisville and 42% decline in Jefferson County since 1978. li i L i ill d 42% d li i J ff C t i 1978 $0.566 $0 566 $0 600 $0.600 $0.500 ue 00 of Assessed Valu $0.367 $0.400 1978 $0.300 $0.218 2012 2012 Per $10 $0.200 $0.126 $0.100 $ ‐ Louisville Jefferson County
Business Tax Incentives Another Challenge h ll • Abatement of 1% occupational tax part of many tax incentives • Growth of tax h f 126 large companies in increment financing Jefferson County have Jefferson County have • Cities can exempt • Cities can exempt received final approval for occupational & property taxes of new tax incentives according to g manufacturing facilities state database for up to 5 years
Sales Tax is a Regressive Tax Sales Tax is a Regressive Tax Who Pays Sales Taxes Vs. Who Pays Income Taxes in Kentucky 6.0% 5.0% 4.0% Sales & Excise Taxes 3.0% Individual Income Taxes 2.0% 1.0% 0.0% Lowest 20% Second 20% Middle 20% Fourth 20% Next 15% Next 4% Top 1% Source: Institute on Taxation and Economic Policy
Who Pays? Who Pays? Source: Institute on Taxation and Economic Policy
Other Challenges with Local Option Sales Taxes l l • Not deductible against federal taxes like ot deduct b e aga st ede a ta es e occupational tax & property tax • Limited growth of sales tax revenue because not g modernized • Loss of state sales tax revenue because of border & consumption effects • Not a solution for localities without a sufficient commercial base i l b • Problem with earmarking for specific projects
Sales Tax Base is Eroding Sales Tax Base is Eroding Sales Tax Revenue as Percent of State Personal Income 2.4% 2 3% 2.3% 2.2% 2.1% 2.0% 1.9% 1.8% 1.7% FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY 10 FY 11 FY 12 FY 13 Source: KCEP analysis of OSBD, BEA data
Context Needed for Local Option Sales Tax • Need for a comprehensive Need for a comprehensive tax reform package that includes sales tax modernization & refundable EITC to address fairness • Can’t be a tax swap or include a tax offset—that would simply shift ld i l hif responsibility
Considerations for local taxation Considerations for local taxation • Broad view of the issue of local taxation should be taken • Tax fairness and revenue sustainability Tax fairness and revenue sustainability must be part of the conversation • Need to address decline in the property tax property tax – Recall provisions – Create a circuit breaker & amend homestead exemption p • Greater scrutiny & disclosure of tax breaks
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