BIPPS at the Table: Committee discussion focuses on need for pro-growth tax policy in localities

In testimony before this week’s meeting of the Interim Joint Committee on Appropriations and Revenue, Bluegrass Institute Visiting Policy Fellow Andrew McNeill urged policymakers to continue thinking in terms of economic competitiveness when it comes to local tax reform – just as lawmakers did with House Bill 8 during this year’s General Assembly, which begins to move Kentucky toward a more pro-growth tax policy based on taxing consumption rather than income.

“For most of the 20 years that I’ve worked in Frankfort, tax reform has been framed by various organizations as a need for more revenue; the idea behind that approach was government spending is what propels prosperity and progress,” McNeill told the committee. “Fortunately, over the last few years that mindset has been changing, notably with last year’s tax reform and the responsible budgets that have been embraced by the General Assembly.”

During this year’s General Assembly, legislation sponsored by Brownsville Rep. Michael Meredith reforming local tax policy – including House Bill 475 proposing a constitutional amendment – overwhelmingly passed the Kentucky House of Representatives but died in committee in the state Senate. Meredith told the committee on Wednesday the amendment “makes sure that the General Assembly still has supremacy over what happens in the local taxing jurisdiction.”

“It does not create a wild, wild west scenario,” he added. “Nothing happens in our cities and counties until the General Assembly comes back and creates an affirmative statutory framework for how the tax would work in local jurisdictions,” which would be required by House Bill 476.

Meredith, who’s worked on local tax policy for several years, said that while 17 states have some form of local income tax, Kentucky’s one of only eight taxing both personal and business income at the local level.

McNeill urged lawmakers to consider how changes to local tax policy would affect taxpayers’ overall burden – a consideration often missing from past discussions.

The same principles which apply toward reform at the state level – including meeting BIPPS’ three -part test for tax policy – should also be followed when creating local tax policy, he said.

“The focus shouldn’t be – or primarily (be) on, and certainly not exclusively on – revenue,” McNeill said. “The focus should be on competitiveness. We think competitiveness places individuals and businesses at the center of the discussion.”

He also urged state lawmakers to incentive local governments to “ratchet down the occupational (local income) tax” by using “organic growth” in revenues created by raising sales taxes and/or expanding the rate-paying base to “buy down rates.”

“Local tax reform, if done right, is another important opportunity to shift the focus away from the need for revenue and prioritize individuals, entrepreneurs and small businesses,” he added. “We believe in the long run that's the way to improve the state's economic competitiveness.”

Watch McNeill’s complete presentation beginning at 36:40 here: https://bit.ly/3Tonezm