Revenue in Review
This week, we're highlighting a presentation to the Budget, Finance, & Economic Development Committee (BFED) of the Urban County Council by Vice Mayor Steve Kay on options for raising revenue rates for LFUCG.
In the last BFED meeting, the Committee heard a presentation from Commissioner of Finance Bill O'Mara about Lexington's current financial outlook. In that meeting and in public statements during the FY21 Budget process, Vice Mayor Kay expressed that the city should consider raising revenue to deal with its financial crisis.
Vice Mayor Kay's presentation this week highlights one potential option for raising new revenue - a .25% increase in the Occupational License Fee/Net Profits Tax. The presentation also makes this case within the context of the city's finances, which are under extreme pressure.
What is the city's current financial situation?
Even before COVID-19, the city's Division of Finance projected a $29M deficit by FY23, even with no new or expanded services.
This projected deficit is the result of several issues, including:
Increased expenses led by a 12% year-over-year increase in the city's pension payments and a 3.5% increase in debt service payments.
Decreased income led by slow revenue growth of only 1.5% year-over-year due to little increase in wages and full employment.
The COVID-19 pandemic made this financial situation even worse. The city projects that it will lose almost $30M in revenue this year alone, originally predicted to be less than $10M before COVID. An even more dire financial picture may take shape if the economic recovery is as slow as predicted.
The city has already dipped into reserve funds, using $36M of non-recurring funds this year alone.
Why consider a revenue increase?
Lexington receives revenue from various sources, but it depends mainly on one of the two sources mentioned above: Occupational License Fees (Payroll Withholding), which made up 53% of the city's revenue in FY21.
Income from many of the city's revenue sources that feed the General Fund has been decreasing since FY19. These decreases include Payroll Withholding revenue, which is down 9% in the past two years.
The city has already instituted several service cuts since FY19. Some mentioned in the presentation include:
9% cut to Parks and Recreation (park programs, etc.)
32% cut to Streets & Roads (paving, etc.)
6% cut to Facilities & Fleet Management (building maintenance, etc.)
The presentation makes the argument that the city should consider increasing revenue rates for the following reasons:
The city has already cut services from the city budget, and LFUCG needs sufficient resources to provide the services the community wants and expects, especially in an economic downturn.
The city's reserve funds have been accessed and shouldn't be tapped further.
How would a revenue increase look?
The presentation only mentions one potential revenue increase option - a .25% increase to Payroll & Net Profits taxes - but it implies other options exist.
The .25% increase would take the Payroll Withholding and Business Net Profit rates from 2.25% to 2.5% annually. This rate increase would bring in approximately $25M annually.
The presentation argues that this approach has four advantages:
Applies only to people earning income and to businesses with net profits
Does not apply to social security and other retirement income
Does not apply to other government benefits
Applies to everyone earning income in Fayette County
This rate increase would impact the following income levels accordingly:
If you earn $15k per year, your taxes would increase $37.50 for the year.
If you earn $30k per year, your taxes would increase $75.00 for the year.
If you earn $50k per year, your taxes would increase $125.00 for the year.
If you earn $100k per year, your taxes would increase $250.00 for the year.
Again, this is only one example, not a specific proposal being made.
Get Involved:
Want to listen to this meeting live?
Tune in on Tuesday at 1pm on LexTV.
Want to learn more about the budget?
Explore our guide to the city budget here.
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