But a pair of bills making their way through the Kentucky legislature would start the process for allowing local governments to tax residents in a number of ways they aren't currently allowed, according to Kentucky League of Cities Executive Director J.D. Chaney.
Chaney, along with Rep. Michael Meredith, R- Oakland, and representatives from the Kentucky Association of Counties (KACo) and business representatives from Louisville and Lexington presented on the bill during the House Standing Committee on Local Government last week.
Unlike several other states, Kentucky's cities and counties are only allowed to collect tax revenue in a few different ways: property taxes, occupational taxes, and fees.
A few different things would need to happen before those local governments could implement other taxes, and House Bill 475's proposed constitutional amendment on a required three-fifths legislative vote would be just the first step. The House passed the bill 80-17 on Wednesday, with a small minority of 10 Republicans and 7 Democrats opposed.
A companion bill, House Bill 476, was also passed on Wednesday 86-11. HB 476 would explicitly allow localities to levy all taxes "not in conflict with the Constitution, provided that the fee or tax" is allowed by statute.
If both bills are passed into law, the following would need to take place before any change in Kentuckians' taxes local taxes occurs: Kentucky voters would need to OK the language of the constitutional amendment on this year's statewide ballot, then the General Assembly would need to explicitly authorize a given type of local tax, then a local government's legislative body would need to approve the new tax.
Meredith said that Kentucky is just one of 17 states in the country that has local income taxes or occupational license fees and is one of the five states that's most reliant on those taxes to fund city and county governments.
A previous version of the constitutional amendment bill failed on the House floor, with only 49 yes votes, in 2020 thanks to a Democrat-centric protest vote.
More than a dozen Democrat sponsors of the bill did not vote for it, largely in protest of what they claim was poor treatment by Republican leaders who told them their vote did not matter.
How Might This Affect Lexington and the Rest of the State?
Lexington-Fayette Urban County Government is quite reliant on the occupational tax for its revenue. The city estimates over $210 million will flow into its coffers through the employee withholdings tax in Fiscal Year 2022; that's well over half of the city's $377.3 million estimated budget.
A spokeswoman for Lexington Mayor Linda Gorton said that Gorton "supports more flexibility for cities in revenue streams."
Andi Johnson, Vice President for Public Policy & Government Relations for Commerce Lexington, said that the bill was important not only for for Lexington but for the nine surrounding counties that her organization assists.
Johnson said that an in-progress regional economic development plan has revealed that the area's reliance on income tax — what she and other advocates call a "tax on productivity" — is a roadblock for increased business development. She called it a "barrier to our competitiveness."
"Unlike economic development efforts in other cities and states, Kentucky's system is heavily reliant the local level on income taxes as well as the net profit taxes on businesses," Johnson said, adding that more than 65% of Lexington's revenues come from personal income or net profits taxes. "If our local governments had more flexibility to consider other sources of revenue, it possibly could enable our communities to lower or even eliminate those taxes on productivity, much of what's being considered at the state level, all with the aim of improving our business climate."
Chaney said that his organization has been "singing this song for an awful long time."
Henderson and Meredith pointed to a 1995 study in Warren County that found that a 1% increase in sales tax there would have exceeded property and occupational tax revenues by $1 million.
On the House floor, a small number of Democrats questioned how an eventual shift away from the income tax would affect the poorest in a community.
Rep. Lisa Willner, D- Louisville, said that it was "just one more strategy to ask poor people and regular Kentuckians to shoulder an unfair amount of the tax burden," mimicking some progressive criticism of a statewide shift away from a reliance on personal income and towards sales taxes. She said that raising local sales taxes would "fall the hardest on those who can least afford it."
Other Louisville Democrats, like Rep. Josie Raymond, voted yes because of the added revenue options it would give to the state's biggest city. She said her yes vote was cast in the hopes that extra revenue would go towards funding pre-K there, a stated policy priority of several mayoral candidates.
A question from Rep. Jason Petrie, R- Elkton, on the floor led Meredith to conclude that if the General Assembly and Kentucky voters fail to approve the constitutional amendment, then existing local tax rates are "very likely" to increase.
Meredith and others on the floor also stressed that any action of the general assembly's does not necessarily mean tax increases on any population.
"It's not really about lowering or raising taxes. This is about the mix," Meredith said. "... it just opens up for a diversified mix of potential taxes at the local level, which would have to be voted on by the local officials."
Rep. Jason Nemes, R- Louisville, voted for the bill and said that he would not be in support of legislation that increases taxes on "home-owning, working families."
"Everybody else needs to be paying, especially tourists that come to our area," Nemes said.
Certain taxes on restaurants and hotels, services that generally impact non-residents of a locality more than occupational and property taxes, are severely limited by current states.
A desire for larger tax reform — shifting the state tax base away from income tax and toward sales tax — has been expressed by several Republican legislative leaders, and Meredith said "there's no way to truly do comprehensive tax reform" without addressing local taxes.
He said he didn't see any issues with potentially moving more toward a sales tax-dominant base on the state and local levels, pointing out that Tennessee does not charge income tax at the state or local level.
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