Tax flexibility

Tax flexibility

Greater tax flexibility strengthens local decision making

Kentucky School Advocate
February 2019

By Josh Shoulta
Staff writer
State and local SEEK funding In the 1989 Rose v. Council for Better Education Kentucky Supreme Court opinion, Chief Justice Robert F. Stephens wrote, “The system of common schools must be adequately funded to achieve its goals. The system of common schools must be substantially uniform throughout the state. Each child, every child, in this Commonwealth must be provided with an equal opportunity to have an adequate education. Equality is the key word here. The children of the poor and the children of the rich… must be given the same opportunity and access to an adequate education. This obligation cannot be shifted to local counties and local school districts.”

However, since the late 1990s and especially since the Great Recession, education funding has been shifting from the state to local communities as school boards have raised taxes to help compensate for reduced state funding. 

Between 2008 and 2018, the share of local funding has risen from 40 percent to 49 percent, according to the Council for Better Education. 

Under state law, property tax remains the primary way locally elected school boards can raise revenue. That can present a problem, as many argue that property taxes are unpopular, hit manufacturers particularly hard and lead to funding disparities among districts.

To address these concerns, many local board members believe, in addition to increased state funding, the legislature should allow boards more flexibility to tailor taxes to the community.

While city and county governments and school boards are all subject to the same taxing limitations set forth in House Bill 44 (1979), including the possibility of a recall for any tax rate that raises revenue by more than 4 percent, city and county governments have a bit more flexibility than boards. 

Those local governments can impose some types of taxes, such as insurance premium taxes and restaurant taxes, that do not have either rate caps or recall provisions.

But cities and counties may also not have enough flexibility overall. For example, some cities and counties have maximum rate limits on their occupational license fees. 

For school boards, every form of taxation is subject to either a rate limitation or a recall, or both, which substantially limits available revenue and places most of the burden on property taxes. 

Of the other taxes school boards can impose, the utility gross receipts tax is the most common, followed by the occupational license tax. If a board attempts to impose any of these taxes, which may be an option in the wake of local factors such as declining property values, they are each subject to a recall vote. 

By comparison, both the restaurant taxes some cities can levy to help operate tourism commissions and the insurance premium tax that cities or counties can impose are not subject to those restrictions.

Allowing school boards to have greater flexibility in taxing authority, and supporting similar flexibility for other local governments, is an issue that the Kentucky School Boards Association hopes the legislature will address this session.

“Good tax policy calls for a balanced, diverse mix of revenue sources,” said Eric Kennedy, KSBA director of governmental relations. “We ask the General Assembly to remove recall provisions from the imposition of permissive taxes by elected school boards.”

If the law imposing such restrictions were amended, the changes would not necessarily result in local taxpayers reaching deeper into their pockets. School boards would still have to act to make any adjustments in their taxes after providing public notice and gathering input in open meetings. 

In addition to removing the recall provision, allowing for new types of taxes could reduce school boards’ reliance on property taxes. With each community facing its own challenges, from collection rates to property valuations, loosening the restrictions would better equip school boards to make tax decisions that are best for their constituents, Kennedy said.
RELATED CONTENT: Check out our 10-year property tax study, first published in the September 2018 issue of the Kentucky School Advocate.
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