The public is now painfully aware that Louisville Metro faces a substantial budget deficit. Due primarily to increased pension funding obligations, Louisville must raise or otherwise find $35 million to cover this increase in its 2020 fiscal year. Mayor Fischer’s proposed plan to triple the insurance premiums license tax from 5% to 15% over a period of years received much attention – primarily negative. Louisville Metro Council ultimately voted against the mayor’s plan, resulting in an uncertain future. Now Mayor Fischer is proposing hefty budget cuts to fill the gap. Many are asking if these are the only solutions. When it comes to raising additional revenues, Louisville and other local governments in Kentucky have few options.
The Kentucky Constitution requires that state and local budgets be balanced. Unlike the federal government, Kentucky and its local governments cannot deficit-spend. Local governments generally have four methods by which they may exact monies from the public to fund their budgets:
- Revenue-raising taxes;
- Regulatory taxes and fees (i.e., licenses);
- Special assessments on property to finance public improvements which benefit the property (e.g., sidewalks); and
- User fees – fees imposed for a public service not also available from a nongovernmental provider (e.g., tolls).
Absent reducing expenses, local governments essentially are limited to revenue-raising taxes as a means to fill a budget deficit. The other three listed methods are not general revenue raisers; they are limited by law to fund specific costs. So, when it comes to revenue-generating taxes, local governments in the state have few options.The Kentucky Constitution permits local governments to levy only two types of taxes: (1) ad valorem (property) taxes; and (2) occupational or license taxes. Local governments with taxing authority are constitutionally required to impose property taxes annually, though the General Assembly can and has imposed limitations on that authority. Occupational or license taxes may be imposed by local governments only if authorized by a statute enacted by the General Assembly. The General Assembly can authorize these local taxes but cannot require that they be levied. Such authorizing statutes often include limitations on local tax-levying authority, such as caps on the rates that can be levied and exemptions or exclusions from the items or persons that can be taxed.
Historical Perspective As for revenue-raising license taxes, the Kentucky Constitution provides that such taxes may be authorized to be imposed only upon “stock used for breeding purposes, on franchises, trades, occupations and professions.” Local governments are subject to constitutional, statutory and judicial restrictions when imposing local revenue-raising license taxes. For example, local license taxes on restaurants may be imposed on the retail sales of restaurants but only by cities that as of January 1, 2014, were classified as cities of the fourth- or fifth-class and local authority is subject to a maximum three percent rate cap. Local room taxes (known as “transient room license taxes”) similarly are subject various rate caps and the tax revenues must be paid over to the local tourist and convention commission. Mayor Fischer likely focused on the local insurance premiums tax as an easy fix because it is one of the few authorized local taxes that does not have a statutory tax rate cap.These constitutional, statutory and judicial limitations on local taxing authority serve an important purpose – they protect local taxpayers from overzealous local elected officials. There is a question, however, as to whether some of these restrictions should be lessened to allow additional options to address the public pension crisis. Previous attempts to provide local governments with additional powers to raise revenue have been largely unsuccessful. For instance, recent legislative attempts to permit local governments to impose local option sales taxes to fund their projects have failed. Even had they succeeded, the Kentucky Constitution would have to be amended to allow local option sales taxes – not a simple task. Attempts to increase taxes within existing statutory authority also have failed. In 2007, Jefferson County voters soundly rejected (67% to 33%) a proposal to create a countywide library district and to levy of a 0.02% occupational license tax on wages and net profits to fund that district.Louisville and many other local governments are now between a rock and a hard place: increase taxes or make large cuts to budgets? Should a local government choose the former option, there are few options for new revenue-raising taxes and increases in existing taxes may be limited or impossible.
License Taxes: What’s Allowed?
Kentucky’s local property tax limitations date back to the late 1970s when the General Assembly took action to curb increases in local tax revenues caused by inflation in property values. The General Assembly enacted a sliding scale of public protections based on the magnitude of the increase in property tax revenue sought local government. A local government generally may increase property tax revenues from real property (land and improvements to land) only after advertising the proposed increase and holding a public hearing. Revenue increases in excess of four percent may be recalled by the voters by filing a recall petition and voting against the increase in a public referendum. Increases in tax revenue from tangible personal property (cars, boats, fixtures, etc.) are tied to the changes in real property tax revenues under a convoluted formula. The four percent limitation generally operates as a ceiling on annual increases in property tax revenues.