Covington Mayor Joe Meyer spoke to Kentucky legislators about the effect of work-from-home labor policies on city finances at a Kentucky House Budget Review Subcommittee meeting last week. He asked the committee members to consider changes to local tax policies that would allow cities to become less reliant on occupational license fees, often referred to as payroll taxes.

“In the long run, the General Assembly needs to come to grips with the reality of the need to diversify revenue options for cities,” Meyer said to the committee. “We need reliable options for sources of revenue to provide the services that are expected by our people.”

Meyer asked the committee to consider legislative alternatives to relying on occupational taxes for cities to fund themselves in the face of changing labor conditions brought about by the pandemic.

Specifically, Meyer discussed how work-from-home policies had siphoned off occupational tax dollars from Covington’s finances, which have historically relied on occupational taxes for revenue.?

“Overnight, our general fund revenue was reduced by 12%,” Meyer said. “Dollar-wise, our general fund… should be about $60, $61, [or] $62 million. It has been reduced this year to $54 million.”

Signs of a problem came earlier this year when the city’s Finance Director, Steve Webb, made a presentation demonstrating that the general fund’s expenses had exceeded its revenue.

Webb attributed the fund deficit to declining payroll tax revenues following the rise of work-from-home policies at the city’s large employers. Specifically, they cited Fidelity Investments, which employs nearly 5,500 people at its office in Covington. Meyer referenced employers generally at the hearing on Wednesday but did not mention Fidelity by name.

This shortfall did not occur in other sections of the city’s budget, most of which were funds used for special projects and programs. Much of the money for those other funds come from grants and other monetary sources unrelated to local tax collection.

Fidelity sent workers home at the onset of the pandemic, but they were allowed to return to the office voluntarily in 2022. Today, employees operate on a hybrid work arrangement with five required in-office days per month. Otherwise, employees are free to work from home, an arrangement many employees still take advantage of, several Fidelity employees told LINK nky.?

As a result, Fidelity began collecting payroll taxes based on where employees were scheduled to work. Many Fidelity employees don’t live in Covington, so if they’re working from home, Fidelity withholds taxes to the jurisdiction where the employees complete their work rather than the jurisdiction where the office is located. Fidelity confirmed this policy in a statement in June.

Covington has made up for the lost revenue by reallocating federal American Rescue Plan Act, or ARPA, money to cover expenses. While this has allowed the city to continue functioning, it’s put a hold on all of the special projects on which the city had initially planned to spend the money, which included everything from affordable housing initiatives to expanded IT infrastructure.?

“If it were not for ARPA, we would have had to immediately layoff about 50 city employees,” Meyer said.?

Most of the city’s employees are essential services, including first responders like police and fire as well as maintenance and public works staff.?

“In order not to affect direct services and public safety we would have to eliminate the entire management structure of the city,” if it weren’t for the cushion provided by ARPA, Meyer said.

Moreover, Meyer said that any decline in essential services could temper new economic growth.?

As an alternative, Meyer pointed to a system used in Georgetown in Scott County.?

“We suggest the legislative fix to specifically base a locus for the remission of the occupational license fee to the city in which the business is located,” Meyer said.?

In other words, employers would automatically pull payroll taxes for the place where the business is actually located, whether the employees are working remotely or not.?

Employees who do not complete their work locally can then “apply for [a] refund,” he added.?

“Something as simple as requiring the employer to withhold according to the jurisdiction in which they’re located would solve our problems,” Meyer said. “And it would also be fair to the employees because they would still be able to get their refunds, and it would reduce the administrative burden on the employer.”

This would only be a short-term fix, however.?

“I’m not here in a position to advocate for any specific proposal on how to do this,” Meyer said. “I just want to point out that this is a very real problem, and I do believe that you, the General Assembly, should put itself in the position in the future to evaluate and look at how we can finance local governments better by supporting that constitutional amendment that really gives you all the authority to deal with this.”

Covington and other cities are reliant upon property taxes, payroll taxes and taxes on insurance premiums for revenue. The state levies sales taxes at 6%, but counties and cities do not have the authority to impose additional sales taxes. The state also imposes a flat income tax on residents of 5%.?

Compared to other states, Meyer argued, this tax structure leaves municipalities constrained in how they can collect revenue.?

“Income tax is better than an occupational license fee,” Meyer said. “The sales tax enables us to to deal with economic growth. There are other revenue options out there, and I’m not picking one or the other here. I’m just describing that those are the reality.

“Cincinnati has an income tax, not occupational license fee tax. They have sales taxes, and that’s the environment in which we have to compete.”

Committee member Sen. Robby Mills (R-Henderson) wanted to know what reassurances Meyer could give against local governments abusing additional leeway in how they taxed residents and businesses.?

Meyer responded by saying that there would be electoral consequences for local officials who played fast and loose with taxes.?

“If we began to step out of line with our tax and service policies, we’re directly accountable to those voters,” Meyer said.?

In addition, Meyer said that public referenda could be used to mitigate the risk of over-taxation.?

“Take it to the people; let them vote on it,” Meyer said. “There are a number of variables that can be done there.

“Our issue is this: we have to prepare for the future… We’re still stuck with local government revenue policies that were established 75, 80, 100, 200 years ago. They’re not adequate for whatever the future is, and the only thing all of us will agree on is the future will be different from what we have today.”

Watch a recording of the full committee hearing at the Legislative Research Commission’s YouTube page.

This article is republished from LINK nky.