The Kentucky CPA Journal

Tax in the Bluegrass

Local tax emerging trends

Issue 4
December 22, 2025

By Mark A. Loyd, JD, CPA

Local taxes are entering a period of rapid evolution. As some states reduce their dependence on broad‑based income taxes, some of their counties, cities, and special districts continue to be dependent on such taxes. At the same time, recent cases are better identifying the constitutional boundaries as to what local governments may tax, whom they may tax, and how interstate activity must be credited to avoid unconstitutional discriminatory outcomes. The result is a complex, uneven landscape with meaningful consequences for resident and nonresident taxpayers, mobile workforces, and multijurisdictional businesses.

State rate reductions and local reliance

A growing number of states—including Kentucky, Indiana, Iowa, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, and West Virginia—have been lowering statewide individual income tax rates, in several cases with stated ambitions to eliminate the tax over time. Kentucky’s reduction to a 3.5 percent individual income tax rate effective January 1, 2026, is emblematic of the broader trajectory. As state revenues move to sales, excise, and other bases, local governments are expected to play a more prominent role in the subnational income tax landscape. In states where local wage or income taxes already exist, aggregate local burdens can be material; in Kentucky, for example, combined local income taxes can reach approximately 3.2 percent in Jefferson County (Louisville). The fiscal and political dynamics point to greater experimentation at the local level, and with that experimentation comes change.

Constitutional guardrails: Uniformity and nondiscrimination

Recent litigation underscores how state constitutional uniformity provisions and federal Commerce Clause principles constrain local tax design.

The Pittsburgh “jock tax” decision illustrates the uniformity constraint. Pittsburgh imposed a 3 percent “Nonresident Sports Facility Usage Fee” on compensation earned by nonresident athletes and entertainers performing at publicly funded city venues. Residents, by contrast, were subject to a 1 percent city earned income tax and a separate 2 percent school district levy—while nonresidents subject to the fee were exempt from the city earned income tax. In 2025, the Pennsylvania Supreme Court held that the scheme violated Pennsylvania’s Uniformity Clause by imposing a higher city‑level burden on nonresidents than similarly situated residents for the same in‑stadium earnings. One key take away in this context is that a taxing authority cannot justify a discriminatory nonresident‑specific levy by aggregating resident‑only taxes imposed by a different local government unit; the school district tax—by law inapplicable to nonresidents—could not be combined with city exactions for “overall” parity. This decision will resonate beyond Pittsburgh for localities contemplating differential nonresident rates or bespoke local income taxes, especially those aimed at visitors, commuters, or touring professionals.

The Zilka litigation highlights an unsettled and consequential Commerce Clause question: whether a state must evaluate and credit out‑of‑state taxes by aggregating state and local burdens across the entire tax scheme, or whether it may confine credits piecemeal to matching labels (state‑to‑state, local‑to‑local). In Zilka, a Philadelphia resident earning wages in Wilmington paid the Philadelphia wage tax and Pennsylvania income tax, as well as Wilmington and Delaware taxes. Pennsylvania credited the Delaware state tax; Philadelphia credited the Wilmington local tax; residual tax burdens remained. A divided Pennsylvania Supreme Court denied relief on the view that aggregation is not required and that internal consistency could be evaluated at the local level. That approach sits in tension with the principle that internal consistency and anti‑discrimination must be assessed at the state level, examining the practical effect of the tax scheme as a whole. Notably, other states, including Colorado and West Virginia, have taken positions more favorable to aggregation, producing a developing split. Although the U.S. Supreme Court denied certiorari, the question remains ripe and unanswered, particularly as states shift burdens to localities in ways that can amplify cross‑border frictions for interstate earners.

Boundary‑testing by localities

With state‑level rate compression and constrained revenue tools, localities are exploring new bases and, at times, testing the limits of their authority.

Some jurisdictions have moved to adopt taxes that state law appears to restrict. Santa Cruz enacted a soda tax even though a California state law has banned local taxes on soda, exemplifying the willingness of some municipalities to directly challenge preemption constraints. Such actions can prompt court challenges, legislative action, or both, creating uncertainty for taxpayers and retailers.

Local governments are also turning to the judiciary in attempts to expand their taxing power. As an example of this trend, the City of Hazard in Kentucky has sought declaratory judgment establishing authority to enact a local restaurant tax.

There also appears to be interest in alternative tax bases. The federal cap on state and local tax deductions exerts downward pressure on state citizens’ tolerance for conventional income‑based local taxes, encouraging exploration of gross receipts taxes, land‑value taxes, and flat assessments. Each alternative carries trade‑offs. Gross receipts taxes provide base stability and are less susceptible to income shifting, but they can pyramid and burden low‑margin businesses. Land‑value taxes can improve efficiency by taxing unimproved land more heavily than improvements, but they require robust valuation infrastructure and often face transitional equity concerns. Flat taxes enhance simplicity and predictability but may raise fairness critiques and uniformity challenges if disparate classes are treated differently in practice.

Practical impacts on taxpayers

These developments have immediate implications. For individuals with multistate wage income, the credit mechanics governing multiple levels of state and local income-based taxes can materially affect the effective tax rate on out‑of‑state workdays. Where a state confines credits to state tax for state tax and local tax for local tax, the residual burden may be meaningfully higher than that borne by purely intrastate workers, which could invite constitutional challenges. Employers with mobile workforces should consider revisiting wage‑sourcing, withholding, and travel policies with a focus on nonresident local levies.

For businesses, the rise of local gross receipts or sector‑specific taxes may add a new compliance dimension. Pyramiding effects, apportionment methodologies, and nexus thresholds can differ from state‑level rules. Companies owning significant real estate enterprises should pay attention to proposals for land‑value components in local property tax regimes and evaluate the potential effect on their bottom line.

Divergent positions taken by cities in the contexts of internal consistency and credit aggregation, coupled with local taxing jurisdictions pushing boundaries, portend litigation. Taxpayers weighing challenges should plan accordingly.

Fragmentation with opportunity

The near‑term trajectory points toward greater fragmentation across local tax systems, with more pronounced variation in base, rate, and credit mechanics. While that can be anticipated to raise compliance costs, it also creates planning opportunities for taxpayers. Taxpayers may turn to the courts to maintain the outer bounds by asking them to invalidate discriminatory nonresident schemes under uniformity clauses and clarifying how internal consistency should be applied when state and local burdens interact. Taxpayers can be anticipated to pay more attention to the bounds of local taxing authority, credit structures, and the practical incidence of new levies and consider how to address these issues.

“Fear will keep the local systems in line.” Grand Moff Tarkin in Star Wars: Episode IV - A New Hope (1977).

As states lower their income tax rates, local taxes will become more consequential. Tax professionals should expect continued experimentation, litigation over discriminatory effects and credit aggregation, and a shift toward alternative tax bases designed to stabilize local revenues.

About the author: Mark A. Loyd, JD, CPA, is a partner of Dentons Bingham Greenebaum LLP in Louisville and chairs its Tax and Finance group. Loyd chairs the Society’s Editorial Board and serves on the KyCPA Board of Directors. He can be reached at mark.loyd@dentons.com.