Year of Publication

2024

College

Martin School of Public Policy and Administration

Date Available

9-17-2024

Degree Name

Master of Public Financial Management

Committee Member

John Foster

Advisor

Iuliia Shybalkina

Co-Director of Graduate Studies

Ronald Zimmer

Abstract

Property tax revenue is widely known as the largest own source revenue for local governments. However, other taxes such as local sales taxes (LST) and local incomes taxes (LIT) also provide significant revenue streams for local governments. For example, in Kentucky, “[e]xcluding Fayette and Jefferson, counties collected a total of $353.5 million in occupational license fees on payroll and net profits in FY 2022, making up 42.7 percent of all tax revenue” (Smith 2024).

The use of LST and LIT, in addition to property taxes, by local governments allows for flexibility and revenue diversification; but, these taxes also come with their own issues and disadvantages. At a Kentucky Chamber event held in February of 2024, Kentucky’s senate leader, Robert Stivers, advocated for eliminating occupational taxes used by local governments. To replace this tax, the senate leader would prefer local governments to assess a consumption tax in the form of a local option sales tax.

In an effort to understand some of the impacts were this change to take place, this paper focuses on the use and issues as it relates to LST and LIT. As part of this, Fayette County is examined as an example of what could be expected if LIT in the form of occupational taxes were replaced with a local option consumption tax in Kentucky. This examination of Fayette County ultimately endeavors to answer the question: What sales tax rate would need to be assessed to replace LIT revenue? The findings of this paper indicate problems with this potential change relating to an unfavorably high LST rate or the need to cut expenditures if a LST rate was capped closer to the U.S. average.

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