A 1-percent local option sales tax would generate $138 million in revenue for the city, but add to an already heavy burden for Louisville taxpayers.
That’s according to a study by a University of Louisville research center released Tuesday.
It is the first official examination of the idea, which is being spearheaded by Mayor Greg Fischer as a way to create additional revenue for Metro Government.
Among the chief findings in the 40-page report is that Louisville has the highest income tax rate among its 14 peer cities at about $7,720 for hypothetical family of four with two income earners. The city also has the third-highest overall tax burden when compared to competitor cities property, income and sales taxes combined.
Fischer has said the local option isn’t a tax increase but rather emphasized it’s choice for local voters to invest into the community and fund key capital projects. But according to the study, introducing a 1-percent sales tax would bump Louisville up to the second-highest overall taxed city among its peers.
Fleming says he sponsored the study to examine the economic impact and better inform the public, adding its shows the benefits and pitfalls of the plan.
“This study does a really good job at taking an objective point of view and looking at data that provides both the pros and cons of what we’re trying to do,” he says. “We should have had this debate last year or two years ago, and we need to have it now to understand where we are economically.”
Among the benefits of a local option outlined in the study is it help diversifies the city’s revenue stream, which is limited to occupational, insurance premiums and property taxes.
The study says due to Louisville’s position as a retail shopping and entertainment center a local option could shift a sizeable percentage of the sales taxes those who live outside the county. The effect could mean residents would enjoy economic windfalls for infrastructure or other capitol projects at a reduced tax price.
And depending on the economy, it estimates anywhere from $140 million to $160 million in projected revenue, which is nearly twice as much as the $95 million a year that Fischer’s office estimated.
“Citizens generally prefer sales taxes to property taxes and income taxes because it is regarded as fair and transparent,” says Janet Kelly, an economic development expert who is executive director of the institute. “Consumers know everyone making the purchases faces the same tax rate and retailers provide a receipt that separates the total of items purchased from the tax charged against the purchases so that the consumer can see the taxable amount and the tax.”
A recent survey found confirmed as much, showing 72 percent of Kentucky voters support allowing voters to have a local option sales tax at their disposal with support of a specific tax depending on the proposed project.
But the report does warn that the local option will have a disproportionate effect on low-income residents even if certain purchases such as food and utilities are exempt.
The study shows an introduction of a one percent sales tax hits poorer income earnest harder and would be an overall 2-percent hike for those making between $10,000 to $15,000 annually, for example.
“Regressive effects are evident across many categories of purchases, two of which are mitigated by the current sales tax structure in Kentucky—food at home and utilities,” Kelly says. “Other categories show that persons with lower incomes are more likely to pay a greater percent of their incomes on housing, transportation, education and health care.”
Fischer has been cheerleading the idea to garner support among residents, council members and the General Assembly. The lobbying hit a roadblock, however, when legislative leaders from both parties in Frankfort dismissed the plan.
The mayor maintains this is a better way for Metro Government to generate new revenue “rather than going to Frankfort and begging for money.”
Currently, 32 states have a local options sales tax and the vast majority have laws allowing cities to use the tool to augment their general funds rather than just specific projects.
The mayor’s office plans to make a heavier lobbying push in January when state lawmakers convene in Frankfort for the regular legislative session. City officials are hoping to get a constitutional amendment on the ballot next year.
Fleming says the study has been shared with fellow council members and the mayor’s office, and he hopes it will united city officials ahead of the General Assembly.
“We need to sit down together in a cooperative manner to go to Frankfort as a unified front—Democrats and Republicans—to find alternative ways to stimulate Louisville economically,” he says. “I’ve talked to Mayor Fischer about doing this together, because if you go up there alone you’re going to get shot down or blocked by one chamber or the other.”
Update 11 a.m.: Here’s the study. We’ll have more from Kelly and Fleming later today.
UPDATE 12:01 p.m.:
Bypassing the study’s finding on tax burdens, Fischer says Fleming’s study does provide valuable information as he discusses the viability of a local sales tax with supporters across the state.
“Local option is about giving people the right to vote on whether to build capital projects in their community through a short-term, one-cent sales tax—and then the tax goes away when the projects are completed,” Fischer said in a statement. “That’s why we are getting such strong support from all areas of the state, including from small cities and large Metro areas. People want the power to decide what’s good for their hometowns.
The mayor says the study shows 13 out of 14 peer cities have a local option and Louisville is at “a competitive disadvantage because of it.”