The Kentucky Constitution prohibits local governments from imposing sales and excise taxes at the local level. Two bills before the legislature this year seek to change that. Senate Bill 135 and House Bill 399 would amend the Constitution to permit the General Assembly to authorize cities and counties to impose a local option sales tax of up to one percent.
Kentucky is long overdue for tax reform. Ranging from state and local income taxes in more than 200 local tax jurisdictions to a narrow application of the sales tax to goods and not services, Governor Steve Beshear was correct in claiming that Kentucky has “an archaic tax system that works against us, not for us,” in his State of the Commonwealth speech earlier this year.
Unfortunately, the governor and legislature is avoiding much needed reforms that would encourage growth and create jobs and has moved to permit localities to tax goods with new sales taxes. Taxpayer groups and local small business oppose this effort because higher tax burdens decrease tax competitiveness, stymie economic growth, and ignore the reality of Kentucky’s genuinely “archaic tax system.”
Because there are so many different tax jurisdictions in the state, this legislation would hurt tax competitiveness not only with border states but within state lines as well. As Tod Griffin from the Kentucky Retail Association points out, “Consumers ‘shop’ sales tax rates between communities within a state. Retailers in a community that elects to impose a local-option sales tax would be put at a competitive disadvantage to those in neighboring communities that elect not to do so. Consumers could save one percent by crossing the county line or, in some areas, by merely crossing the street.”
The Kentucky Retail Association predicts that if enacted statewide, a one percent local option sales tax would reduce disposable income by $500 million annually. Given that Kentucky is ranked in the bottom half of all states for the Tax Foundation’s Business Tax Climate rating, HB 399 and SB 135 will exacerbate Kentucky’s waning competitiveness.
Because these bills require voter approval, some have suggested that letting voters decide whether taxes go up locally is common sense. It remains to be seen whether those same pundits support putting local option income tax cuts on the ballot. Kentucky is after all only one of twelve states with local income taxes ranging up to 2.5 percent, on top of the top rate of 6 percent.
Americans for Tax Reform urges legislators to reject efforts to authorize local option sales taxes. Supporters of Kentucky HB 399 and HB 135 will be directly responsible for every dollar in higher taxes imposed by localities if these bills pass and a referendum is successful. As such both bills are a violation of the Taxpayer Protection Pledge.