Under Kentucky’s constitution, there are limits on the types of taxes the General Assembly may authorize local governments to levy, and local sales taxes are not allowed. 1 The 2024 General Assembly may take the first step toward changing that if it considers an amendment to the constitution that would grant the legislature broader authority on this issue. If lawmakers approve the amendment it would be added to the ballot, with voters making the final decision.
Some suggest this change would allow local governments to raise additional revenue to better fund pressing community needs. However, there is legitimate concern that expanding local revenue options to include sales taxes could instead be part of moving Kentucky closer to eliminating the income tax, the stated goal of some in Frankfort, and not at providing much needed additional revenues for local governments.
As described in this brief:
- The amendment’s proponents have said that the General Assembly will require local governments to offset any revenue from newly imposed sales taxes by reducing other taxes, particularly occupational and corporate net profits taxes. This requirement would be unsurprising, as reducing or eliminating local income taxes mirrors some lawmakers’ efforts to eliminate the state income tax.
- Even if a full trade-off isn’t required and local governments are permitted to raise some new revenues following the amendment, there is real concern that the General Assembly will scale back state spending that currently supports local public needs. The pressure to do so will grow the more the legislature reduces the state individual income tax, its single largest revenue source that generated 41% of General Fund revenue as recently as 2022.
- If the amendment passes and is implemented with such trade-offs, the consequence would be more regressive tax systems with higher taxes on low- and middle-income families and lower taxes on wealthy people and corporations, without increasing net revenue for the public services we all rely on.
Those leaders considering supporting this amendment should ask proponents hard questions about how it will be implemented. The path described above would widen inequality in every community. For metro areas with greater commerce, it would mean revenue-neutral shifts to more regressive tax systems. And for Kentucky’s many rural areas with little commercial bases from which to generate local sales tax revenues, it would mean greater hardship due to reduced resources even as residents pay higher sales taxes when they make purchases elsewhere.
Legislative proponents say they will prevent a local sales tax from benefiting communities the way some local leaders envision
The most recent version of the proposed constitutional amendment is 2022’s House Bill (HB) 475.2 The amendment itself would broadly permit the General Assembly to pass laws allowing localities to levy taxes that are not in conflict with the constitution, including sales taxes. By itself, the amendment just allows the General Assembly, rather than the constitution, to determine what local revenue options are available and under what conditions.
But it is common for constitutional amendments to include companion bills that set forth the rules for implementing the amendment should the voters approve it. The latest version of the companion legislation to this amendment is HB 476.3 But unlike most companion bills, HB 476 does not spell out how the new powers will work. Instead, it just expressly prohibits localities from moving forward with the imposition of any sales tax, with the final law outlining how it will work presumably to be revealed only after it is approved on the ballot. Not having legislation up front explaining what the General Assembly will do with this new authority shrouds its implementation in obscurity. The likely purpose of this lack of transparency is to try to maintain a range of potential supporters of the amendment, including those who see it as an opportunity to raise additional revenue for local governments.
However, public statements indicate that the goal is not for additional revenue to result. Legislative proponents have made it clear on numerous occasions, including during a 2022 meeting of the Interim Joint Committee on Appropriations and Revenue and more recently at a meeting of the Interim Joint Committee on State Government, that it is not their intention for the amendment to generate the net additional tax revenues that many local governments deeply need.4 Instead, their goal is to shift away from income-based taxation, such as local occupational and net profits taxes, toward consumption-based taxation, such as local sales taxes, just as is happening at the state level with deeply harmful consequences.
Therefore, if the constitutional amendment passes, we should expect the General Assembly to require any locality that wants to levy a sales tax to fully or partially offset the revenue with lower occupational and net profits taxes.5 If required offsets are how it will be implemented, any lawmaker or local government official who is looking to the constitutional amendment as a way to generate meaningful revenue for their local governments should not expect that to be the outcome.
Revenue-neutral shift to sales tax would be regressive
Rather than raising revenue, the amendment’s success would result in potential tax shifts at the local level that cut taxes for the wealthy and corporations and raise them for low- and middle-income working Kentuckians. The impact in each community would vary based on what choices local officials make. But according to an analysis by the Institute on Taxation and Economic Policy, if half of the state shifted from occupational taxes to sales taxes at the local level, the poorest 60% of Kentuckians on average would pay more in taxes, while the richest 1% of Kentuckians would receive an average tax cut of $2,423.6 More giveaways to the powerful few would be paid for through greater hardship for those struggling.
Proponents of this shift argue that greater reliance on consumption taxes will grow our economy. This theory is false.7 In fact, many of the states with the fastest economic and population growth and the highest quality of life rely heavily on graduated income taxes. Several of those states have even expanded taxes on millionaires in recent years.
Given this context, support of the amendment merely fuels the claim that moving away from income taxes is wise. In fact, the eventual elimination of the individual income tax, which funded 41% of the General Fund budget until recent cuts began, would be a disaster.8 It would result in deeply slashed funding for schools, hospitals and other needs, along with much higher taxes at the state and local levels on working families. Yet under HB 360 passed in the 2023 General Assembly, full elimination of the individual income tax is now an explicit state goal.9
State is likelier to tell localities “you’re on your own” to fund local needs, draining new local revenues and harming rural areas in particular
The General Assembly has already reduced the top individual income tax rate by 33% (from 6% to 4%), putting considerable pressure on future state budgets after the current period of low national unemployment inevitably ends. If the legislature allows local governments to generate some new revenues from sales taxes as it continues to eliminate the state individual income tax, it is reasonable to expect it to also pass more funding responsibilities to localities as the state’s own resources become more limited.
There are a number of services and types of infrastructure and investments that are partially or fully funded through the state budget that the legislature could potentially pass on to localities if the latter have new local revenue sources available. This shift could easily consume funds generated from a new sales tax. Examples of local needs for which state funding currently plays a role:
- A variety of infrastructure projects including water/sewer, bridges, parks, flood control, broadband
- Public health departments
- State parks operation and maintenance
- Payments to house those incarcerated by the state in county jails
- “County Costs” related to performance of functions required by state statutes
- Commonwealth’s Attorneys and County Attorneys
- Property Valuation Administrators
- Local coal severance-funded services and projects
- Tourism and arts funding
- Transportation including county, rural secondary and municipal road aid and public transportation
If such a shift in funding responsibility were to occur, poorer rural areas would be particularly ill-equipped to pay for these new costs. Commercial sales subject to a sales tax are concentrated in a small number of more-prosperous counties. As a paper published in the Journal of Public Budgeting, Accounting and Financial Management put it, local sales tax systems “exacerbate inequality between local communities by actively moving revenue from poorer communities to more wealthy ones. We find evidence that [local sales tax] systems cost poorer counties a greater percentage of their total budgets than is gained by the wealthy counties that attract retail activity.”10
KyPolicy analysis of Census data shows:
- Seven Kentucky counties have more than half of the sales that would be subject to the sales tax. In contrast, 23 of our less populated counties added together have less than 1% of sales that would be subject to the sales tax.
- Retail and services sales subject to the sales tax are 17 times greater per capita in the five counties with the largest relative commercial bases compared to the five counties with the smallest relative commercial bases.
- A total of 87 of Kentucky’s 120 counties have a smaller share of the state-wide sales subject to sales tax than their share of the Kentucky population. These tend to be poorer rural counties whose needs simply cannot be met from local sales taxes, and who will be disproportionately harmed by reductions in state spending resulting from a lower state income tax.
The map below shows how sales tend to cluster in metro and suburban areas to an even greater degree than population, with people from rural areas traveling to commercial locations for shopping.
Concerns about how amendment will be implemented must be answered
Local communities need more revenue, but there are serious concerns that the proposed constitutional amendment — due to the way it will likely be implemented by this General Assembly — will not solve that problem. Instead, it could fuel greater income inequality in our communities – by race, income and geographic location – through a more inequitable tax system.
- As currently interpreted, the language in the constitution allows local governments to levy only property taxes and license taxes on businesses and occupations, which means they cannot be authorized to levy local sales taxes or other excise taxes. See OAG 13-001 here: https://www.ag.ky.gov/Resources/Opinions/Pages/Opinions.aspx
- House Bill 475, 2022 Regular Session of the Kentucky General Assembly, https://apps.legislature.ky.gov/record/22rs/hb475.html.
- House Bill 476, 2022 Regular Session of the Kentucky General Assembly, https://apps.legislature.ky.gov/record/22rs/hb476.html.
- Interim Joint Committee on Appropriations and Revenue, October 19, 2022, https://ket.org/legislature/archives/2022/interim/interim-joint-committee-on-appropriations-and-revenue-193682. Interim Joint Committee on State Government, August 24, 2023, https://apps.legislature.ky.gov/CommitteeDocuments/33/.
- There is precedent for the legislature putting limits and conditions on the revenue local governments can generate from methods already allowed by the constitution. For example, a county with a population greater than 300,000 can have an occupational license tax (which applies to wages, salaries and net business profits) of no more than 1.25%; a county of more than 30,000 people but less than 300,000 can have an occupational license tax of no more than 1%; while counties with under 30,000 people have no limit on their occupational license tax rate at all. In another example, in the 1970s, when rising property values began pushing property tax revenues up, the legislature passed HB 44 that created provisions allowing voters to recall annual property tax rates that would increase revenue from real property more than 4% above the prior year. And in the most recent legislative session, the General Assembly passed legislation phasing out the local property tax on bourbon aging in barrels. The proposed constitutional amendment will not lift any of these restrictions.
- Jason Bailey, “A Move from Local Occupational Taxes to Sales Taxes Would Be a Regressive Tax Shift,” Kentucky Center for Economic Policy, March 10, 2020, https://kypolicy.org/a-move-from-local-occupational-taxes-to-sales-taxes-would-be-a-regressive-tax-shift/.
- Jason Bailey, “Income Tax Cuts Are a Way to Sink the Economy, Not Grow It,” Kentucky Center for Economic Policy, February 14, 2022, https://kypolicy.org/income-tax-cuts-are-a-way-to-sink-the-kentucky-economy-not-grow-it/.
- Jason Bailey, “With Mounting Needs and Fear of Session, State Should Suspend Income Tax Cuts,” Kentucky Center for Economic Policy, Oct. 5, 2022, https://kypolicy.org/with-mounting-needs-and-fear-of-recession-state-should-suspend-tax-cuts/.
- House Bill 360, 2023 Regular Session of the Kentucky General Assembly, https://apps.legislature.ky.gov/record/23rs/hb360.html.
- Patrick J. McHugh & G. Jason Jolley, 2012. “The Sheriff of Nottingham’s Favorite Tax: How Local Option Sales Taxes Exacerbate Budget Inequalities Between Local Governments,” Journal of Public Budgeting, Accounting & Financial Management, vol. 24(3), pages 466-488, March, https://ideas.repec.org/a/eme/jpbafm/jpbafm-24-03-2012-b004.html.