Kentucky House speaker: Cities should have option to levy local taxes

Kentucky House Speaker David Osborne, right, chats with Greater Louisville Inc. president and chief executive Kent Oyler, left, and Louisville Plate Glass President Bill Stone. | Photo by Boris Ladwig

Kentucky House Speaker David Osborne said that municipalities such as Louisville should have the option to levy local taxes, a goal long pursued by the Louisville chamber of commerce and Mayor Greg Fischer.

Osborne told members of Greater Louisville Inc. Monday afternoon that changes the state has made to the tax code in the last two years have helped Kentucky employers create more jobs and make more investments than ever before.

But, he said, more work is needed, in part to fix unintended consequences from legislation passed in the last two years, in which Republicans have held a supermajority.

“As we continue our long-term vision … we understand the importance of including local government tax reform in that equation,” Osborne said. “We have to empower local governments to serve their citizens in the way it works best for them.”

GLI has long supported amending the state constitution to allow for a local option sales tax. Mayor Fischer as recently as December called for Louisvillians to lobby for such an option.

Osborne said that he has previously supported allowing cities to implement a local sales tax, though he said that previous proposals have been incomplete, especially given the weighty step of amending the constitution.

Ultimately, though, he said he believed that any additional revisions to the state tax code would “include some type of local government tax reform to allow local governments the tools they need to serve their citizens better and then stop relying so much on the taxing authority of the state.”

State and local sales taxes in Kentucky and some nearby states | Screenshot courtesy of the Tax Foundation.

Kentucky’s state sales tax is 6 percent, the 38th-highest in the nation according to the Tax Foundation. Except for Virginia (5.63 percent), all of Kentucky’s neighbors have a higher sales tax, with Tennessee having the highest, at 9.46 percent.

However, the economist and former Indiana University professor Morton Marcus recently said in a column, that lowering the income tax and increasing the sales tax “may be revenue neutral, but tends to favor the wealthy and rest disproportionately on the less than wealthy.”

For example, If a Kentuckian who earns $20,000, pays 7 percent on the purchase of a $1,000 item, he is taxed at 0.35 percent of income. A Kentuckian who earns $100,000 would, for the same item, pay the same $70 in taxes, but that would amount to just 0.07 percent of income.

Osborne also said that legislators have to recognize that school districts across the state cannot function effectively in a one-size-fits-all system. Jefferson County Public Schools, which last year narrowly escaped being taken over by the state because of management failures, faces dynamics that differ materially from those faced by other schools, Osborne said.

“We have to let them handle things differently,” he said.

‘The pension crisis is real’

Osborne also said that although the state has tackled many difficult issues in the last two years, challenges remain.

“We know that we face many unresolved problems,” he said. “… None is more consequential than the pension system.”

Kentucky Retirement Systems provides benefits for more than 370,000 current and retired state employees. It has $16 billion in assets with an unfunded liability of $27 billion.

A pension bill the legislature passed in 2018 was struck down unanimously by the Kentucky Supreme Court in December.

“Make no mistake, the pension crisis is real,” Osborne said. People “are rightfully scared and they should be because it’s their livelihood.”

However, he said believed that together with stakeholders and experts around the country, state lawmakers would find a solution that is both politically palatable and constitutional — though he warned it would take time.

“Anyone that thinks that we will have a quick agreement on this issue is wrong,” Osborne said.

Fixing the pension system is difficult because of inexperienced legislators and political polarization, he said.

Nearly half of chamber’s members have been elected in the last two years, which means, Osborne said, that they’re new to some of the issue’s complexities.

And even within caucuses, legislators meet strong opposition.

“This continues to be … the most divisive and the most controversial issue that we have dealt with in modern history in Frankfort,” Osborne said.

The second part of this year’s legislative session is scheduled to start Tuesday and end March 29.