How Repealing The Inventory Tax Could Affect Kentucky's Public School Budgets

Oct 10, 2017

Governor Matt Bevin has been outspoken about overhauling Kentucky’s tax system. Bevin said he wants to get rid of the inventory tax, which is placed on a company’s inventory that is held in the state. That tax is used to fund local school districts, and some worry that eliminating the inventory tax will have a negative impact on education. Little detail has been released about what would replace that revenue.


While Bevin wants the inventory tax to go, he also says the state has to be aware of the unintended consequences of such a move, including the loss of money local school districts receive from those taxes. In a video recently shown at a tax summit sponsored by the Kentucky Chamber of Commerce, Bevin said something has to be done to replace that lost revenue, but offered no details.

“Why from a tax front, would we have an inventory tax if we want to produce, manufacture, engineer, design and send to the world 21st-century products,” Bevin said in the video.

 

 

Public school budgets rely heavily on inventory and other property taxes. Still, some tax experts say inventory taxes should be eliminated to make the state more competitive for businesses and jobs. Many researchers agree the inventory tax should go and the state has to have something in place to make up for that lost revenue. But it’s unclear what--if any--solutions have been proposed to replace funding from inventory taxes.

Economist Bill Fox
Credit University of Tennessee

Bill Fox is an economist and researcher at the University of Tennessee who thinks Kentucky should eliminate its inventory tax. He said the most important thing that state and local governments can do is make sure that the economy can work well. Fox said in order to do that, a state has to have a trained labor force with the right kind of skills. He explains that means investing in education.  

“Don’t take tax reform as an excuse to quit investing in education, make sure you keep doing that and so you can’t just devastate your taxes,” Fox said.

Morgan Scarboro, an analyst with the Tax Foundation, said getting rid of the inventory tax makes business sense. She said taxing a business's inventory incentivizes companies to keep their products in states without those taxes, and added Kentucky is only one of 14 states to have this tax. But Scarboro also said she doesn’t want to see school and localities suffer financially if the inventory tax is eliminated. She said it’s the state’s responsibility to replace the revenue that localities would lose if the inventory tax is repealed.

Morgan Scarboro, right, speaking on a panel at the Kentucky Chamber of Commerce's annual tax summit.
Credit Becca Schimmel

“It’s definitely a conversation that legislators need to have because you can’t just, you can’t just take away a large source of their budget and expect them to be fine,” Scarboro said.  

 

Scarboro said there’s no one-size-fits-all tax code, because each state’s needs are different.

 

While it’s one thing to suggest repealing the inventory tax, it’s another thing to make up the lost revenue. There seems to be little or no consensus on what should be done to replace revenue localities would lose from such a change. Eric Kennedy, Director of Governmental Relations for the Kentucky School Board Association, said since 2008 he’s seen the burden of education funding shift from the state level to the local level.

Eric Kennedy in the middle, speaking on a panel about tax reform at the Kentucky Chamber of Commerce's annual tax summit.
Credit Becca Schimmel

“So as part of state and local tax reform, I hope that quite frankly we increase the revenues available to the state so that they can make a bigger better investment,” Kennedy said.  

Kennedy said repealing the inventory tax without a proper replacement could bankrupt some schools. For example, money from the inventory tax makes up nearly 15 percent of Caverna Independent schools budget in Barren County. According to data from the Kentucky Department of Education, every school relies on the tax for at least a small percentage of their budget. If the inventory tax is repealed, the revenue schools would lose is offset by a state funding mechanism. Support Education Excellence in Kentucky funding, or SEEK, would provide just $3,000 for every $1 million dollars lost in property tax assessments.

 

Kennedy wants to see schools move away from their dependence on property and inventory taxes. He said it’s the biggest driver of inequality, because of the way the wealth is distributed.

 

“When you have a community that has a very small property assessment base, it’s rural, it’s sort of high poverty,” he said. “They could increase their tax rate on property and not really produce as much revenue as the same rate increase would produce in a more affluent area where property values are much higher.”

 

Kennedy said relying heavily on those taxes creates a crisis of inequality for school districts across the state. Gov. Bevin said he wants to make Kentucky’s tax code more competitive and encourage more businesses to locate in the Commonwealth. Kennedy said in order to make that happen, more investment in schools is needed at the state level.

 

“No one will want to locate or expand in a state if the schools are not of a high quality to train their workforce,” Kennedy said. “We must invest in our schools first and foremost before we seek to reduce taxes out of the concern for being competitive.”

 

Kennedy isn’t opposed to eliminating the inventory tax and moving schools away from their dependence on other property taxes. He said he hopes schools remain part of the conversation and he’s waiting to hear how the state plans to replace any revenue school districts would lose from tax reform.