DOCUMENT RESUME ED 463 577 EA 031 576 AUTHOR Wildasin, David E.; Childress, Michael T.; Hackbart, Merl; Lynch, Lawrence K.; Martie, Charles W. TITLE Financing State and Local Government: Future Challenges and Opportunities. INSTITUTION Kentucky Long-Term Policy Research Center, Frankfort. 2001-00-00 PUB DATE NOTE 160p.; Accompanying CD-ROM not available from ERIC. PUB TYPE Books (010) Reports Descriptive (141) EDRS PRICE MF01/PC07 Plus Postage. DESCRIPTORS Elementary Secondary Education; Finance Reform; Policy; Tax Rates; *Taxes *Kentucky IDENTIFIERS ABSTRACT This report focuses on state and local taxation in the state of Kentucky. It looks into what "the ideal" tax system looks like and how Kentucky's system compares, whether the current system will provide adequate revenue for the long-term, whether the tax system is efficient, how fair and equitable the tax system is, and whether the state is competitive with respect to the taxation of business. There are eight chapters: "Tax (1) Reform in Kentucky: Principles and Practice"; "Recent Trends in Kentucky (2) State and Local Tax Policy"; "Sales Taxation in Kentucky: Problems and (3) Prospects"; "Tax Equity in Kentucky: Family Tax Burdens and the Question (4) of Fairness"; "Business Taxes in Kentucky"; "Local Government (5) (6) Finances in Kentucky"; "The Impetus for Tax Modernization: Economic, (7) Demographic, and Political Change"; and (8) "Tax Reform: Review and Perspective." A glossary of tax-related terms is included after the summary, and a CD-ROM providing fully indexed access to reports on Kentucky state and local finance is included on the back cover. (Contains 48 figures and 26 tables.) (RT) Reproductions supplied by EDRS are the best that can be made from the original document. 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I hereby grant to the Educational Resources Information Center (ERIC) nbnexclusive permission to reproduce and disseminate this document as indicated above. Reproduction from the ERIC microfiche or electronic media by persons other than ERIC employees and its system contractors requires permission from the copyright holder. Exception is made for non-profit reproduction by libraries and other service agencies to satisfy information needs of educators in response to discrete inquiries. Sign Printed Narsitionfritie. . c:/Zr 1/(1#1/ 4/ (7 b Organiz un/Addrese: please Telephone: FAX3-ac;-',5b _TD Go / E-Mail Address: Ca- (over) 4 , , ";')". _ma ., J.,, I 4 , c21 ,No of owl 00% 'V r 1 g :Mb Future Challenges PERMISSION TO REPRODUCE AND DISSEMINATE THIS MATERIAL HAS I BEEN GRANTED BY and Opportunities I , rY1 &vv111e(to TO THE EDUCATIONAL RESOURCES INFORMATION CENTER (ERIC) 1 By David E. Wildasin Michael T. Childress U S DEPARTMENT OF EDUCATION Office of Educationai Research and Improvement Merl Hackbart EDUCATIONAL RESOURCES INFORMATION CENTER (ERIC) Lawrence K. Lynch O This document has been reproduced as received from the person or organization onginating it Charles W.. Martie O Minor changes have been made to improve reproduction quality Points of view or opinions stated in this document do not necessarily represent official OERI position or policy I I A , BEST COPY AVAILABL FINANCING STATE AND LOCAL GOVERNMENT Future Challenges and Opportunities By David E. Wildasin Michael T. Childress Merl Hackbart Lawrence K. Lynch Charles W. Martie SCHOOL KENTUCKY OF PUBLIC POLICY IIKMARTIN AND ADMINISTRATION 0 L5L'NC-FER.N1 PL)1.1C1 RESEARCH CENTER Published By: KENTUCKY LONG-TERM POLICY REEARCH CENTER 111. St. James Court Frankfort, Kentucky 40601-8486 www.kltprc.net 2001 Library of Congress Control Number: 2001 129491 printed with state fiinds available in alternative formats upon request KENTUCKY LONG-TERM POLICY RESEARCH CENTER BOARD OF DIRECTORS Rep. Steve Nunn, Chair Betty Griffin, Vice Chair EXECUTIVE BRANCH Diane Hancock Mary E. Lassiter Donna B. Moloney James R. Ramsey LEGISLATIVE BRANCH Sen. Tom Buford Sen. Alice Forgy Kerr Rep. "Gippy" Graham AT LARGE MEMBERS Evelyn Boone Ron Carson Paul B. Cook Daniel Hall Jennifer M. Headdy Sheila Crist Kruzner Penny Miller Robert Sexton Alayne L. White EXECUTIVE DIRECTOR Michael T. Childress The Kentucky Long-Term Policy Research Center is governed board of directors, by a 21-member including four appointees from the executive the legislative branch, six from branch, and eleven at-large members representing universities, local organizations, governments, and the private sector. From the at-large nent of the board, compo- six members are appointed by the Governor and five by the Legislative Research Commission. In accordance with its authorizing the Center is attached to the legislation, legislative branch of Kentucky state government. PREFACE the Governor, the General Assem- mission to advise and inform As part of its policies, the Ken- the long-term implications of bly, and the public about with the University of Research Center, in conjunction tucky Long-Term Policy Administration, reports here on tax of Public Policy and Kentucky Martin School of the state's This collection of articles by some policy in the Commonwealth. of tax systems the underlying principles and purposes leading experts considers in light of these, consid- Commonwealth's overall tax structure and examines the long term, its fairness to fami- current system over the ering the adequacy of our This report also explores the and its competitiveness. lies and businesses, the chal- demographic trends for the future and implications of economic and modernize our tax system face that efforts to reform and lenges and opportunities Whether read in its here and, more recently, in other states. in view of their history topics, policymakers at chapters that address discrete entirety or as stand-alone concerned about the fiscal future of all who are interested in and every level and interest in this report. will likely find information of the Commonwealth KENTUCKY LONG-TERAI 1)01.10. RESE:1RO I CENTER by the General Policy Research Center was created The Kentucky Long-Term The broader context to the decisionmaking process. Assembly in 1992 to bring a of current policies, illuminate the long-range implications Center's mission is to future. The Center influencing the Commonwealth's emerging issues, and trends significance to the identify and study issues of long-term has a responsibility to and mechanism for coordinating resources Commonwealth and to serve as a long-range planning. groups to focus on Kentucky Long-Term the Executive Director of the Michael T. Childress serves as information about the Center Those interested in further Policy Research Center. directly at: should contact his office 111 St. James Court Frankfort, Kentucky 40601-8486 800-853-2851 Phone: 502-564-2851 or Fax: 502-564-1412 or 800-383-1412 e-mail: [email protected] www.kltprc.net CONTENTS Preface Figures ix Tables xiii Summary xv Glossary xxiii Authors xxv Acknowledgments xxvii Tax Reform in Kentucky: Principles and Practice 1 Recent Trends in Kentucky State and Local Tax Policy 15 Sales Taxation in Kentucky: Problems and Prospects 27 Tax Equity in Kentucky: Family Tax Burdens and the Question of Fairness 39 Business Taxes in Kentucky 57 Local Government Finances in Kentucky 73 The Impetus for Tax Modernization: Economic, Demographic, and Political Change 103 Tax Reform: Review and Perspective 123 FIGURES Figure S.1: Distribution of Kentucky State and Local Government General Revenue. 1998-99 xv Figure State and Local 1: Revenue as Percent of Personal Income. Kentucky 16 Figure 1: State and Local Revenue as Percent of Personal Income, Kentucky, Relative to the U.S. Average 17 Figure 3: State Revenue as Percent of Personal Income, Kentucky 18 Figure 4: State Revenue as Percent of Personal Income, Kentucky, Relative to the U.S. Average 18 Figure 5: Local Revenue as Percent of Personal Income, Kentucky 19 Figure 6: Local Revenue as Percent of Personal Income, Kentucky, Relative to the U.S. Average 19 Figure 7: State and Local Tax Revenue as Percent of Personal Income, Kentucky 21 Figure 8: State and Local Tax Revenue as Percent of Personal Income, Kentucky, Relative to the U.S. Average 21 Figure 9: State Tax Revenue as Percent of Personal Income, Kentucky 22 Figure 10: State Tax Revenue as Percent of Personal Income, Kentucky, Relative to the U.S. Average 23 Figure 11: Local Tax Revenue as Percent of Personal Income, Kentucky 23 Figure 12: Local Tax Revenue as Percent of Personal Income, Kentucky, Relative to the U.S. Average 24 Figure 13: Distribution of Kentucky and U.S. Household Income, 2000 41 Figure 14: Distribution of Kentucky Taxpayers by Federal AGI Class, 1998 42 Figure 15: State and Local Tax Burdens on a Two-Parent Family of Four in Kentucky, 1998 43 Figure 16: State and Local Taxes on Nonelderly Married Couples in Kentucky, 1995 44 Figure 17: Percent of Tax Paid by Income Class 44 Figure 18: Kentucky Income Tax: Effective Marginal Tax Rates by Income Class 54 Figure 19: Indices of Growth in Income and Revenue, FY 1990-2001 58 .4 ix Figure 20: General Business Taxes per $100 of Private Gross State Product, Kentucky and Surroundine States, 1998 68 Figure 21: Comprehensive Business Taxes per $100 of Private Gross State Product, Kentucky and Surrounding States, 1998 69 Figure 22: Personal Taxes per $100 of Private Gross State Product, Kentucky and Surrounding States, 1998 70 Figure 23: Growth in County Property Tax Revenues, 1998-2000 82 Figure 24: Number of Municipalities Imposing Occupational License Tax, by City Class and County 86 Figure 25: Percentaee of Municipalities Imposing Occupational License Tax, by City Class and County 86 Figure 26: Number of Municipalities Imposing Occupational License Tax, by Assessed Rate 87 Figure 27: Occupational License Tax, by Municipality Type and Assessed Tax Rate 87 Figure 28: Occupational License Tax for Cities and Counties, by Tax Type 88 Figure 29: Kentucky School District Revenue by Level of Government, 1990-2000 90 Figure 30: School District Revenue by Level of Government, Percent Contribution, 1999-2000 91 Figure 31: School District Funding as a Percent of Adjusted SEEK Base 2000 SEEK Funding 93 Figure 32: Utility Tax Revenue as Percent of Total Local Revenue, Number of School Districts, 1998-2000 94 Figure 33: General Fund Receipts by Major Sources, 1974-2000 105 Figure 34: Sources of Local Tax Revenue in Kentucky, 1997 106 Figure 35: Services and Goods in Kentucky's Economy as a Percentage of Gross State Product, 1977-1998 108 Figure 36: Household Projections by Age of Head, Kentucky 113 Figure 37: Percentage of Population 65 and Older, by County 113 Figure 38: Estimated Annual Sales Tax Paid, by Age Group 115 Figure 39: Civilian Labor Force Participation Rates by Age, 1950-1998, and Projected, 2015-2025 116 Figure 40: What source of retirement income will be most important? 119 Figure.41: Federal Funds as a Percentage of Kentucky State and Local Expenditures, 1977-1999 120 Figure 42: Number of Tax Law Changes in Kentucky, 1990-2000 129 Figure 43: Tax Changes in the States, 1990-1999 131