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Tax aimed at lobbyists could empty lobbies

By Caleb O. Brown

The City of Frankfort needs quick cash, but the plan to raise it could slowly kill business.

Including mandated benefits for current and retired city employees, Frankfort’s payroll costs rise by $1 million each year in a city that spends just $15.5 million a year on payroll. Thus, the city needs the money.

To raise it, the Frankfort City Commission voted to extend occupational license taxes to so-called “itinerant workers” – lobbyists, attorneys and journalists who do some work in the capital city but are employed in Louisville, Lexington or other places.

However, Frankfort residents and politicians should consider that nonresidents already pay for services supported by the city’s occupational taxes. Workers that drive into Frankfort at 8 a.m. and leave at 4:30 p.m. each weekday subsidize services that primarily benefit residents.

Frankfort’s tax base remains stronger than the city’s population would otherwise justify. But that apparently holds little meaning to city commissioners, who seem determined to solve the city’s cash-flow problems by primarily raising taxes on out-of-towners.

Here’s an example of how the plan would work: Hundreds of registered lobbyists received a letter in June indicating they would have to ante up unpaid taxes going back to 2002. Taxes and fees – plus penalties and interest – for an individual lobbyist during that time period could reach $400.

A version of the tax passed Monday requires a person that works “six or more days in Frankfort or makes more than $4,000, his employer must pay 1.75 percent of net profits, salaries or wages,” according to the Frankfort State-Journal.

Most lobbyists, journalists and attorneys coming into Frankfort already pay occupational taxes – sometimes at higher rates – in cities where they are based. But Frankfort’s new tax policy forces lobbyists and companies whose employees regularly travel to Frankfort to figure differences in rates between cities.

This policy offers the potential for a lot of problems.

If Frankfort insists on collecting the tax from the past five years, it could increase the tension that exists between lobbyists and local officials. During a meeting on the tax change, David Thompson, executive director of the Kentucky Press Association, asked rhetorically, “Is that two-hour reception going to put us over the threshold?”

If lobbyists begin thinking like Thompson, they may decide they’re getting too close to triggering that tax bite and shift their activities to other locations to avoid a letter from the Frankfort taxman.

While the potential benefit of the occupational tax hike to Frankfort’s coffers is obvious, less clear and more harmful is the impact on local businesses.

Lobbyists spend a great deal of money in Frankfort. They stay in hotels. They buy food and drinks and tip the wait staff. They stop at the dry cleaner. They play golf. They might take in a movie.

Perhaps most important, lobbyists host conferences, receptions and other hospitality events that might dry up because of this tax policy.

Those lobbyists willing to comply with the tax provisions will find themselves meticulously tracking time they spend inside city limits to avoid more taxes.

Let’s consider the Capital Plaza Hotel. During the longer biennial legislative sessions, the downtown hotel reportedly hosts two to four events per week for lobbyists and lawmakers. The hotel also caters events at the downtown convention center, often sponsored by those same lobbyists. Much of that activity could shift just beyond the city line.

The Frankfort State-Journal reported this: “Lobbyist Donna Brown said she has already canceled one all-day continuing education seminar for 60 clients. It was to be held at the Capital Plaza Hotel and include a luncheon. Brown said she might cancel a three-day convention for 300 people also to be held at the Capital Plaza Hotel in April.”

It takes no stretch of the imagination to see that revenue generated by the hotel and other Frankfort businesses might decline if the city maintains insistence on collecting a relatively small amount of new revenue from out-of-town lobbyists working in Frankfort.

The economic journalist Henry Hazlitt boiled his lesson in economics down to a single sentence: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

In their haste to solve a short-run fiscal crisis, Frankfort’s political leaders clearly have not learned this lesson. Before they dig in and stick lobbyists and others with this punitive tax, they should consider how it might affect the city residents they want to serve.

– Caleb O. Brown is a researcher for the Bluegrass Institute. Contact him at caleb.brown@gmail.com.

The Bluegrass Institute is an independent research and educational institution offering free-market solutions to Kentucky's most pressing problems.

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