Effects of Shifts in the Local Tax Base on Economic Outlook

In Kentucky, local governments can impose taxes on property and income. Tax options and maximum rates are limited by the classification of the city, which is loosely based on population size. In the summer of 2017, the City of Henderson, Kentucky’s City Council passed an ordinance that lowered real estate tax rates and raised the occupational payroll tax rates. This shift is forecasted to be net neutral for city revenue, which raised the question of how changes in the local tax burden affect a Kentucky city’s long run economic outlook. In a theoretical model, the businesses and population would move outside of the area where the rate increase took place. For example, increases in the real estate tax would cause people to move outside of city limits, and increased payroll tax rates would cause businesses to move outside the city as well. However, as these movements would incur relocation costs, we hypothesize changes in local tax rates will have a minimal effect on a city’s economic growth