By Tom Fromme
Kentucky cities are facing a financial crisis. By now, everyone should be aware that cities are experiencing rapid increases to our state pension costs. We need to move forward with new ways to raise revenue to pay for this obligation and other costs.
Under Kentucky law, sales tax is collected by merchants and sent to Frankfort for distribution as the state sees fit. Many other taxes are also collected in this manner. Local governments are then required to plea for “distributions” from Frankfort. This is a very centralized form of government and a very inefficient and outdated one as well. We are still operating under a State Constitution adopted in 1891 when a majority of the state was rural.
The Kentucky League of Cities has made revenue diversification a priority for the 2020 legislative agenda. Amending the state constitution to permit cities the ability to adopt a local sales tax is one of their recommendations. Here is an excerpt from the League’s Legislative Priorities publication:
Kentucky law restricts how cities collect income, and as pension costs and other expenses skyrocket, local elected officials are forced to make tough decisions. If the legislature doesn’t enact reforms, public safety and community services will be reduced or eliminated. While many cities have already cut budgets and trimmed staff, there are few options left as cost climb.
Local communities provide an assortment of critical services that have the greatest impact on your quality of life, but cities have limited ability to raise the revenue needed to pay for these services. Kentucky is one of only 12 states, which prohibit local government from collecting sales tax revenue.
Under our current obsolete system, property owners are burdened with an inordinate share of costs. A home is taxed by your city, school district, county, state and special taxing districts. Often, in many cities, your vehicle is also taxed by the same entities. Everyone is taking a bite of the same property tax apple. The state legislature should put forth a constitutional amendment allowing a local option sales tax to be decided by the voters.
An amendment that would authorize an additional one percent to the current six percent sales tax charged by the state is needed. If a city decides to levy the one percent sales tax, home owners would not be required to pay local city property taxes. This would provide a significant break to home owners while providing for renters and others to pay their fair share for services through the sales tax. A community could also opt out by choosing not to collect the one percent sales tax based on upon their particular financial need.
In Newport, property tax generates $2.2 million of the city’s annual $20 million budget. A one percent increase in the sales tax is estimated to bring in significantly more revenue than the property tax now generates. This would provide crucial funding for public safety, parks, infrastructure improvements, pensions and more. It would also more equitably distribute the cost among residents who pay for these vital services. Some cities may not choose this option, particularly those that raise a majority of their revenue from property taxes.
2020 is a budget year in Kentucky, meaning legislators will spend most of their time during the next session crafting the state’s two-year budget. This process in recent years has been besieged by budget cuts, rising costs of services and insufficient funding to cover public pensions. I encourage and even implore our state lawmakers to explore ways to allow cities to not only charge a local sales tax, but to also keep the money where it is generated – in communities like Newport. The state has been talking about tax modernization for years, it’s time to quit talking. I urge others in city government and residents to join me in this call and request your local state representative to support this amendment.
Tom Fromme is the city manager of Newport, Ky.