Back to Business Taxes in KentuckyBy David E. Wildasin
From Financing State and Local Government
p. 73-102, published 2001
Local governments are an important part of any complete picture of government finance in Kentucky. They raise significant amounts of revenue, and, especially in the area of education funding, are the recipients of substantial transfers from the state government. The types of taxes that localities can use, and the amount of revenue that they can obtain from these taxes, are regulated by the state government. The result is a complex system of intergovernmental fiscal relations. The equity and efficiency implications of the existing system, considered as a whole, are quite uncertain. Potential reforms of local government finance raise important issues about the value of local fiscal autonomy and related questions of efficiency and equity in taxation and overall public-sector performance.
Local governments in Kentucky—counties, cities, school districts, and special districts—raise a significant amount of revenue using a variety of tax instruments, including but not limited to local property taxes. Their tax systems are regulated in important ways by the state government, and they are also the recipients of substantial transfers from the state government. Basic data about the role of local governments in the overall fiscal system of the state are presented in Chapter 2. The present chapter focuses on a number of more specific aspects of local government finance in Kentucky. The first section is devoted to a discussion of the economic effects of local property taxes and to the potential impact of House Bill 44 (HB 44), a major property-tax limitation statute passed in 1979. This chapter also reviews the use of local “income” taxes (more properly, local occupational license taxes) in Kentucky. The third section focuses on the financing of local school districts, paying particular attention to limitations on the types of tax instruments available to these governments and also to the system of fiscal transfers through which the state government supports local school district expenditures. The remainder of this chapter is devoted to a preliminary discussion of the issue of local fiscal autonomy and state restrictions on the powers of local governments to choose their own fiscal policies.
Local governments in Kentucky are constrained both in the types of taxes that they can use and in the tax rates that they are permitted to apply. In some instances, localities are required to impose taxes no lower than a specified amount (for example, school districts cannot reduce property taxes below a certain rate); in other instances, there are maximum tax rates (for example, the occupational license tax rate for a county government generally cannot exceed 1 percent); and in still other instances, tax rates can be adjusted but only in ways that are compatible with limits on annual growth in revenues (most local property tax rates must be adjusted so that revenues grow no more than 4 percent annually); higher increases are possible, but may be subject to special voter approval. In the case of local school districts, not only taxes but expenditures are limited: school spending cannot fall below certain levels, nor can it exceed certain levels. This system of fiscal regulation has created a very complex structure of local taxation in Kentucky, many (if not all) details of which are reviewed in the following sections. But before delving into these complexities, it is appropriate to review some basic principles that can guide our thinking about state regulation of local government fiscal policy.
Local Policy Autonomy and Economic Efficiency. At least from the viewpoint of economic analysis, the main rationale for regulation of the fiscal policies of lower-level governments by higher-level governments is that the latter, if unregulated, may choose policies that are in some way detrimental to the broader interests represented by the former. A good example of this appears in the commerce clause (Art. 1, Sec. 8) of the U.S. Constitution, which prevents state governments from erecting barriers to free interstate commerce, such as tariffs on imports from other states. The commerce clause limits the menu of policy options for each state in ways that might be seen as harmful when viewed from the perspective of a single state, but it preserves a free internal market for the U.S. economy as a whole, with great economic benefits for the residents of all states. Acting unilaterally, individual states might find it advantageous to introduce impediments to interstate trade but they would neglect the economic harm that this causes for other states. Each in the end would be harmed by the policies of the others, and restrictions on the freedom of individual states can ultimately make all better off. Similarly, state government regulation of local policies may improve overall economic performance for the residents of the state, especially when localities are thereby prevented from pursuing policies that are harmful to residents of other localities. The economic term “externality” is often used to describe situations where the actions of one decisionmaker (a consumer, a firm, or a government, depending on the context) affect the economic well-being of others in the society without their explicit agreement.(85)
On the other hand, one of the chief economic benefits of a federal structure of government is that it allows lower-level governments to exercise autonomy in significant spheres of policymaking so that policies can be adjusted in accordance with the priorities, interests, and varying conditions found in different jurisdictions. The state of Kentucky has wide latitude in choosing its fiscal policies and is not required to mimic exactly the policies of New York, California, or Alaska, or to follow the directives of the U.S. Congress or of a Washington bureaucracy. Instead, state government officials attempt to adapt state tax policy, expenditure priorities, and other public policies to the political constituencies that matter most to them—voters in their districts, representatives of important commercial interests, and the like. Kentucky’s economic policies reflect a gradual and ongoing process of adaptation to changing economic, demographic, and other important conditions within the state. By the same logic, the policies of local governments can reflect the varying circumstances of individual localities within the state. The residents of one locality may place a high priority on improvements to roads, others may consider public safety a critical need, and still others might emphasize the need for better water and sewerage systems. Local governments thus provide a political framework within which local priorities can be articulated so that scarce tax revenues can be directed to their highest-value uses. In this way, local fiscal autonomy can promote more efficient resource allocation than would be achievable by having all policies controlled by a higher-level government.
A lack of uniformity in policymaking is thus a hallmark of a federal system of government. Each state and local government is likely to choose policies that differ somewhat from those of other states and localities. Precisely because of the economic, social, and demographic diversity of states and localities, it is usually economically inefficient—that is, wasteful of scarce resources—for all policies, including tax policies, to be applied uniformly to them. But not all of the manifestations of economic and other diversity are necessarily welcome. The residents of a poor state or a poor locality may not willingly tax themselves at a rate sufficiently high to finance the same level of provision of public goods and services as the residents of a rich state or locality. This is as true of states and localities at different points in time as it is for states and localities at any one moment in time. To take a historical illustration, Kentuckians today are far richer than they were a half century or a century ago, and levels of public services that would have been regarded as extravagant in earlier times are taken for granted today. Kentuckians could have attempted, in 1901, to establish a road system of a size and quality that approximates that of 2001, but to do so would have wasted scarce resources that were instead put to higher-priority uses, both private and public. Similarly, in present-day Kentucky, some regions and localities are more affluent than others. Residents in some localities might resist paying taxes for levels of public services that seem well worthwhile to taxpayers in other localities. Inequality in local public-service provision is an expected consequence of underlying economic inequality.
Local Policy Autonomy and Equity. Inequality, which is a mathematical concept, is not necessarily the same thing as inequity, which is an ethical concept. Any particular form of inequality may or may not be an inequity, and some types of equality might be viewed as inequities. Without prejudging the ethical issue, it is clear that a number of state government regulations and other policies are designed (whether effectively or not) to bring about greater uniformity of public service provision. This issue is discussed further below in the context of primary and secondary education.
One can see from the foregoing remarks that the basic issues of equity and efficiency arise in state-local fiscal relations and regulatory policies. If the residents of a particular locality value a public service and are willing to pay for it in the form of higher taxes, there is a reasonable presumption that they should be allowed to do so on economic efficiency grounds. From the viewpoint of the “benefit” principle of taxation, such local taxes and spending seem fair: local residents are exchanging their tax dollars for valued public services. However, if local policies harm or benefit other localities, state intervention may be justified on efficiency grounds either to discourage or encourage the local activities that produce adverse or favorable effects on others. Efficient resource allocation may, however, come into conflict with equity goals because efficient provision of public services by local governments typically results in variation in public service levels as a consequence of varying local demands and costs. Intervention by the state government may help to limit the scope of local variations, which, while it can conflict with efficiency, may promote equity.
In summary, as a guideline for thinking about the issue of local fiscal autonomy, it is helpful to bear in mind the key questions:
Local expenditure and revenue autonomy has substantial potential economic benefits which are worth preserving, but sometimes it may be better to curtail local autonomy in order to enhance the efficiency of resource allocation or to promote important equity objectives. These principles can provide policy guidelines to ensure that regulations imposed on local governments, where warranted, are targeted as effectively as possible and impose the least cost.
As noted in Chapter 2, local governments in Kentucky, including school districts, rely much less heavily on property taxes as a source of revenues than do most local governments in the United States. Does this mean that local governments are somehow unduly constrained in their ability to raise revenues, or does it simply reflect a policy shift away from reliance on the local property tax? Recall from Chapter 2 that local governments in Kentucky obtain a comparatively large share of their revenues from “income” taxes. In the very important area of primary and secondary education, a comparatively large fraction of the revenues of local school districts derives from transfers from the state government.
Whether deliberate or not, Kentucky’s de-emphasis of the property tax raises several questions for public policy. How does a shift toward income taxes and away from property taxes affect the economic incidence of taxes in Kentucky? How does such a shift affect economic incentives, recognizing that both forms of taxation may change the rewards for various forms of economic behavior? Does the current mix of taxes provide local governments with a high degree of fiscal autonomy, enabling them to respond effectively to varying local demands?
This section examines the main revenue instruments used by local governments in Kentucky, focusing particularly on the finances of municipal and county governments and leaving school districts aside for later analysis. After reviewing some of the important economic aspects of local property taxation, the focus shifts to state policies that have governed local use of the property tax. Finally, local taxes on income are discussed, again focusing on state regulation of local taxing powers and the issue of local fiscal autonomy.
The economic effects of local property taxes has been the subject of considerable study. To a first approximation, economists view the local property tax mainly as a tax on the return to investment in real property, including both residential and nonresidential real property. If investment in property is expected to yield a return of, say, 10 percent annually, then a property tax rate equal to 1 percent of the value of the property lowers the net return on the investment from 10 percent to 9 percent; similarly, a 3 percent tax would reduce the net return to 7 percent. These taxes would, respectively, be equivalent in their effects to taxes on the return to investment of 10 percent or 30 percent. As such, the property tax can be expected to reduce the level of investment in a locality or, when applied by many localities, in the state as a whole. These effects can produce significant efficiency costs, in many ways not dissimilar to those resulting from an income tax.
It should be noted, however, that the local property tax not only discourages investment in particular jurisdictions. It also tends to reduce the number of residents and the volume of commercial and industrial activity, for instance by shrinking the housing stock (since property taxes raise the cost of housing) and by limiting the number and size of firms located within a given jurisdiction. While this might appear to be an adverse impact of the tax, it partly serves a useful resource-allocation function. When more people reside in a locality, the cost of providing public services (police and fire protection, education, and many others) to a now-larger population will rise. The presence of these households thus imposes a cost on the locality. The same is true for businesses, whose presence again necessitates the expenditure of additional public-sector resources in order to meet their demands for local public services. From the viewpoint of economic efficiency, these households and businesses should locate in a given jurisdiction if the economic benefit of doing so exceeds the cost, and this cost includes the burden that they impose on local government. In order for them to face the proper incentives in making locational decisions, it is desirable for them to bear taxes, in each locality, equal to the cost of providing additional public services on their behalf. There are many ways that this can be achieved, to some approximation. Local development or impact fees, regulatory mandates from zoning boards that require property developers to build roads, water and sewerage systems, and other infrastructure and user fees for water, electricity, and other local services are all examples of mechanisms by which the cost of providing public services can be assessed, directly or indirectly, against those for whom these services are provided. The local property tax can also do this, even if somewhat imperfectly. The local property tax, then, may discourage the growth of the local housing stock or of commercial and industrial property, but to some degree this “internalizes” the costs that local residents impose on local governments and contributes to a more efficient pattern of spatial development.
Thus, on efficiency grounds, the local property tax has some potential advantages and some potential disadvantages. The same is true for other local taxes, including local income taxes: they create fiscal disincentives that discourage the taxed activity (for example, the earning of income), which generally is harmful to economic efficiency. But they also provide a means by which the costs of local public services can be absorbed by (or distributed to) those whose presence gives rise to those costs, and in this respect they are conducive to efficient locational choices. To the extent that local governments in Kentucky rely relatively more heavily on “income” taxes and less heavily on property taxes, they create a somewhat different set of fiscal incentives, the efficiency consequences of which are also somewhat different. To the extent that local governments in Kentucky rely on state government revenues, the costs of local public services are borne by taxpayers throughout the state rather than those who reside in a particular locality. Local taxes then internalize the costs of local public services to a smaller degree, and the locational decisions of households and businesses would be less influenced by these costs.(86)
On vertical equity or ability-to-pay grounds, the property tax is often viewed as less appealing than an income tax, assuming of course that one believes that the income tax, in practice, is reasonably closely correlated with ability to pay. The real economic incidence of the property tax imposed by any single locality, or even by all localities within a given state, likely falls on property owners only to a limited degree. In the long run, investment in any one locality, or in the entire state of Kentucky, is likely to earn about the same as the rate of return elsewhere in the economy. Although a 3 percent local property tax might at first reduce the net rate of return on investment, homeowners, landlords, and owners of commercial and industrial property will not suffer a lower net rate of return in a single jurisdiction forever. By discouraging investment through property taxation, the size of the local housing stock shrinks, causing rents to rise; the amount of local commercial activity diminishes, causing the prices of locally-provided goods and services to rise; and the less-profitable components of local industrial capacity disappear, until, in the end, local investment earns the same rate of return, net of tax, as can be obtained elsewhere. In this process of adjustment, the real economic burden of the tax is shifted to the consumers of local housing services and other locally-provided goods and services, to local landowners (whose land offers less profitable investment opportunities), and possibly to local workers, whose wages may fall as employment opportunities contract. These adjustments of economic behavior, triggered by the imposition of the property tax and the fiscal incentives that it creates, cause the real burden or incidence of the tax to be shifted from property owners to others.
State and local income taxes produce some of these same effects, as well. As noted in Chapter 1, income taxes reduce the incentives for taxpayers to produce taxable income. They also reduce the incentive to live in a state or locality where income tax burdens are high, and this impact is likely to be more important for households with large amounts of taxable income. If a state or locality must compete for labor, including the labor of households with high incomes, the real economic burden of taxes on high-income households will tend to be shifted to others. The mobility of labor limits the ability of a state or locality to reduce the real income of taxpayers through income taxation.
In 1979, the Kentucky statutes governing local property taxes were revised in a significant way. Through the enactment of a measure known as HB 44, Kentucky limited the ability of local governments to determine local property tax rates. This limitation remains in effect today.
Under the provisions of HB 44, the property tax rate imposed by a local government—a county, municipality, school district, or other special district—cannot normally be set at a level that would result in an increase in total revenue by more than 4 percent above the revenue collected during the preceding year. From time to time, new local governments, particularly “special districts,” come into existence. These units of government are also subject to HB 44 limits. But because HB 44 applies to annual growth in revenue, it does not restrict the property tax rate for a local government in its first year of operation.
The HB 44 limitations are subject to two important exceptions. First, revenue growth that results from the taxation of “new property” is not subject to this limitation. For example, when a new housing subdivision is built, the extra tax revenue that is received from taxation of the new housing in the year that it is initially assessed is ignored in determining whether the locality in which it is located is in compliance with the 4 percent limit. Second, a locality can exceed the 4 percent limit, provided that this increase is not overturned by the voters in a special election which may be called in order to challenge it.(87) This voter-approval requirement obviously allows for more rapid growth in tax revenues, but it also erects a barrier to increases in property tax revenues in the normal course of policymaking.
A regulation like HB 44 can potentially have many important effects on local government finance. (1) It might significantly restrict the amount of property tax revenues that localities collect, in aggregate. (2) Aside from any aggregate impact it may have, it could significantly restrict the amount of property tax revenues for at least some particular localities. (3) It could result in heavier reliance on other local taxes. (4) It could result in the creation of additional special districts.(88) It would be a challenging task to sort out exactly what impact HB 44 has had in each of these (and other) dimensions since many factors other than HB 44 influence local policy. Nevertheless, it is possible to shed light on at least some of these questions. The following discussion reviews the evidence with regard to (1), (2), and (4). Other local taxes are discussed subsequently.
Aggregate Trends in Property Taxation Since 1979. First, the discussion in the second section of Chapter 2 reveals that Kentucky has collected a relatively small amount of revenue from property taxes, at least expressed in relation to personal income, for quite a long time. Figures 7, 9, and 11 of that chapter also show that the burden of property taxes has been remarkably stable in relation to personal income. The data in those figures begin with 1977, that is, two years prior to the enactment of HB 44. One cannot discern any dramatic immediate impact of this regulation on aggregate local property tax revenues in Kentucky.
Data on Individual Counties, 1998-2000. The aggregate figures can of course be misleading; in particular, the overall picture may be dominated by a comparatively small number of large localities, disguising important effects on other local governments. It is therefore of interest to consider whether any particular local governments seem to have been especially limited by HB 44 constraints. For example, for each year since 1979, one might wish to know how many of the hundreds of local governments in Kentucky imposed property tax rates that exceeded the HB 44 limit (perhaps as a result of special voter approval), how many chose tax rates that placed them at or very close to the 4 percent revenue growth limit, and how many chose tax rates that were well below this limit. If virtually no localities have been at or near the limit, one could reasonably conclude that the limit has not had much effect on local government policies, whereas if the tax rates in many or most localities were at the upper limit, this would indicate that the HB 44 limit was a significant restriction.
Unfortunately, data have not been collected on a systematic basis that would allow for a thorough examination of this issue. The best data are those that have been collected for the past three years by the Department of Local Government, although these data pertain only to county governments and do not include municipalities, school districts, or other local governments.
To determine the relevance of the HB 44 revenue-growth limit, Figure 23 illustrates the degree to which Kentucky counties have fully, partially, or more than fully exploited the property tax revenues that would be available to them under this limit. To understand this figure, note that the “compensating” tax rate is the tax rate that a county (or other local government) would need to impose in order to raise the same amount of revenue as in the preceding year. Of the counties for which data are available (slightly fewer than the total of 120), Figure 24 shows that 38 of them, on average over the 1998-2000 period, imposed property tax rates equal to the compensating tax rate, that is, tax rates that would enable a county to obtain the same revenue as in the preceding year.(89) Only 2 counties, on average, imposed tax rates bringing in revenues in excess of the 4 percent limit, 12 chose rates that were just at the HB 44 limit, and another 14 chose rates that brought revenue growth of between 3 and 4 percent. A large number of counties (38) chose tax rates that resulted in revenue growth of between 0 and 3 percent, and a small number of counties (13 altogether) chose tax rates below the compensating tax rate.
Figure 23: Growth in County Property Tax Revenues, 1998-2000
Figure 24: Number of Municipalities Imposing Occupational License Tax, by City Class and County
These results indicate that approximately 10 percent of counties are at the HB 44 limit in any given (recent) year. Fewer than 10 percent would be at this limit for two or more years in succession. Another 10 percent of counties are close to the limit in a given year. Most counties (about two thirds) choose tax rates that are at or somewhat above the compensating tax rate; these counties could achieve significantly higher revenue growth while remaining within the HB 44 limit, and the remaining 10 percent of counties are still further from the application of HB 44 limits. On balance, it appears that HB 44 limits are not completely irrelevant for county governments, but the number of counties directly affected by these limits in a typical year is rather modest.(90)
Growth in Special Districts. If HB 44 makes it difficult for localities to increase revenues by raising tax rates, there might be important public services that are left unfunded or underfunded. Conceivably, one response to this problem would be to create new special districts which would be given responsibility for providing particular types of services and the authority to raise property taxes on their own. This could either be done in order to provide new types of services or to separate the provision of certain existing services from the rest of the local government budget. In either case, the creation of a new property-tax-financed district would require the imposition of taxes at some initial rate which would be unconstrained by HB 44. In subsequent years, the district would then face the same limits on revenue growth as other local governments, but, compared to the situation prior to its creation, the total potential property tax revenue within the area served by the district and by other local governments (the county or one or more municipalities) would be higher by an amount equal to the revenue collected in the initial year, augmented by up to 4 percent in subsequent years. The continuous creation of new special districts would offset and could theoretically completely eliminate any impact of HB 44.
Interestingly enough, the number of special districts in Kentucky (measured using the standards of the U.S. Bureau of the Census) did rise markedly around the time that HB 44 was introduced. However, as shown in Table 13, the biggest increase in this respect actually occurred prior to the 1979 enactments, between 1972 and 1977. The number of special districts has fallen by approximately one third since that time. As it happens, Kentucky’s experience tracks a nationwide trend, with a major increase in the number of special districts in the mid-1970s followed by a decade of modest growth and then a period during which the number of special districts declined.
Table 13: Special Districts, Kentucky and U.S., 1972-1997
Tracking the number of special districts is obviously a rather different matter than tracking the amount of revenue they receive. Further analysis might reveal some interesting impacts of HB 44 on the types of special districts that have been created (or eliminated) over time, and the very definition of a special district is a subject worthy of additional study. But the data presented here provide at least a preliminary indication that HB 44 has not resulted in a dramatic proliferation in the number of special districts in Kentucky. Quite aside from HB 44, the data in Table 13 suggest that it would be of considerable interest to understand exactly what forces are at work in determining the number of special districts, not only in Kentucky but throughout the nation.
Conclusion. Has HB 44 imposed a significant limitation on the ability of local governments in Kentucky to raise revenues? The evidence presented above is mixed. In aggregate terms, it appears that property taxes in Kentucky were not dramatically affected by the imposition of HB 44. Since that time, property tax revenues have grown approximately in proportion with income. Furthermore, they have grown approximately in proportion with local property tax revenues elsewhere in the country. Conceivably, the aggregate amount of property tax revenues collected by local governments might have been quite different in the absence of HB 44. If so, however, this would have entailed a departure from Kentucky’s traditionally limited reliance on property taxation.
There is very limited information on the extent to which HB 44 limits have affected individual local governments. During the most recent three years, it appears that HB 44 limits may have impinged directly on fewer than one fifth of the county governments––a small but significant proportion of the total. Of course, HB 44 could affect local government fiscal policies in more subtle ways. For example, it could encourage counties not to cut taxes when they might otherwise have done so, for fear of not being able to raise taxes sufficiently in the event of higher future revenue needs. A much more detailed and comprehensive analysis would be required to determine whether these types of effects may be present.
There have been substantial changes in the number of special districts in Kentucky during the period since (and before) the enactment of HB 44. It is difficult to see direct evidence of any impact of tax limitations on the tendency to create (or eliminate) special districts.
Overall, then, the available evidence does not suggest that property tax limitations have had a major impact on local government finance in Kentucky. These limitations probably have had significant effects in some instances, although even in cases where it appears that counties have fully utilized the local property tax there remains an open question as to how much higher their tax rates would have been in the absence of HB 44. Collection of additional information, carrying county-level data back in time and extending the data to include local governments other than counties, would be very helpful in obtaining a clearer picture of the potential impact of HB 44 on local government fiscal policies.
Current Utilization of Occupational Taxes by Counties and Municipalities. Kentucky’s local governments rely to an unusual degree on taxes that the U.S. Bureau of the Census classifies as “income” taxes. These taxes are more properly described as “occupational license fees” or “occupational license taxes.” They are not levied on “income” as it is measured for purposes of the Kentucky income tax, but rather on either or both of (1) wages, salaries, and other compensation of employees and (2) the net profits of businesses, trades, occupations, or professions. In contrast to the state (and federal) personal income taxes, the occupational license taxes are not applied to such forms of income as dividends, interest, or capital gains received by households, nor do these taxes include any personal exemptions or deductions.
There is a complex system of regulations that determine whether any particular type of local government may use an occupational tax, and if so, at what rate the tax may be applied. Table 14 provides a concise summary of the main features of this system.(91) Note that counties can impose rates that exceed the usual maximum, subject to voter approval if special elections are called for this purpose. The limits on local use of occupational taxes are similar in this respect to those that apply to the use of the property tax, as discussed above.
Table 14: Occupational License Taxes by Government Unit
Information regarding the utilization of occupational taxes by municipalities and counties is presented in Figures 24 and 25.(92) Mid-size municipalities account for the greatest number of such taxes. In general, larger municipalities are more likely to impose such taxes. Somewhat fewer than half of all counties in Kentucky impose an occupational tax. As shown in Figure 26, occupational taxes are most frequently levied at rates in the 1 to 2 percent range; in no case does the tax rate exceed 3 percent. Figure 27 shows that occupational tax rates tend to be somewhat higher in mid-size cities, though comparatively few have rates in excess of 2 percent. Recall from Table 14 that the tax rates for cities in classes 2-5 are not restricted by the state, so much higher rates than those shown in Figure 27 could, in principle, be observed.
Figure 24: Number of Municipalities Imposing Occupational License Tax, by City Class and County
Figure 25: Percentage of Municipalities Imposing Occupational License Tax, by City Class and County
Figure 26: Number of Municipalities Imposing Occupational License Tax, by Assessed Rate
Figure 27: Occupational License Tax, by Municipality Type and Assessed Tax Rate
As for the type of occupational tax that is used by local governments, Figure 28 reveals that most tax both the earnings of workers and the net profits of businesses. A significant number, however, tax only wage income.
Figure 28: Occupational License Tax for Cities and Counties, by Tax Type
Equipped with these basic facts about the use of occupational license taxes by county and municipal governments, we may tentatively draw several conclusions. First, many but not all of these governments do utilize the occupational tax. For those localities that do not use this tax, there is unexploited potential to raise additional tax revenues if desired. The same is true for most municipalities, which are not subject to statutory limits on the tax rates that they may impose. County governments could in principle impose taxes well in excess of the usual 1 percent limitation if they were to obtain special voter approval, and thus they, too, could potentially increase their revenues from heavier use of the occupational tax, though in practice it appears that the statutory limitation has effectively constrained some county governments. Overall, the occupational tax seems to have provided county and municipal governments with a reasonably flexible source of significant revenues, one that could be exploited more heavily, if needed, in order to meet urgent local priorities.
Some Additional Issues. Employee compensation accounts for a large—in most instances, the major—portion of the occupational tax base. Since the tax is imposed at a flat rate, it is most easily administered by taxing the payrolls of employers. Unless special provisions are made, this method of administration results in the assessment of taxes based on a worker’s place of employment rather than place of residence. In the most common situation, workers reside in the same city or county where they work, but there are significant numbers of instances where people reside in one locality and work in another. As a matter of policy, should one locality be able to impose taxes on the residents of another?
Generally speaking, the ability to reach beyond jurisdictional boundaries to impose taxes on nonresidents creates incentives for governments, representing the interests of local voters, to export their tax burdens, that is, to shift as much of the burden of financing local services to nonresidents as possible. Aside from the potential inequity that such tax exporting creates, it can also interfere with efficient resource allocation: if the benefits of local services are enjoyed by local residents but the costs are shifted to nonresidents, the former have an incentive to expand services whose benefits fall short of their true costs. However, many local public services, such as police and fire protection, water and sewage services, and access to local transportation, are utilized by nonresidents as well as residents. The commuters who spend the working day in a city not only benefit from public services provided in their place of employment, they (or their employers) impose some costs on the locality where they work. Again, leaving equity issues aside, this can contribute to inefficient resource allocation. One of the real costs of productive activity is the provision of public services to employers and employees. Employment in a particular location is efficient when the value of what employees produce is at least as great as the value not only of their time but of other resources, including public resources, that are used in the production process. An employment-based tax provides localities with an opportunity to recover the cost of providing public services to those who work within their boundaries.
The occupational tax is based on income rather than on the cost of public service provision. A tax, user fee, or price that is more closely linked to the value of resources used would generally be more efficient than one based on income; for example, it is more efficient to charge for water usage on the basis of the amount consumed, or for bus transportation on the basis of trips taken, rather than through earnings-based taxes. For many public services, however, such pricing schemes are not possible. The occupational tax is an imperfect substitute for cost-based charges, and perhaps it functions as well as any feasible alternative in this respect. In principle, it could certainly be inefficiently overutilized by local governments seeking to capture resources from nonresidents, but there is little evidence available to suggest that this is a major problem in Kentucky.
A related but somewhat different issue concerns the use of the occupational tax in overlapping jurisdictions. Every municipal government is located within the boundaries of a county, and both of these units of government are allowed to impose occupational taxes. Under current state law, a taxpayer who is subject to both county and municipal taxes can credit the municipal tax against any county occupational tax liability. To see the potential implications of this rule, suppose that a county imposes a 1 percent occupational tax on its residents, including those in the county seat and other municipalities within the county. This tax, by itself, would produce a certain amount of revenue. However, given the county tax at 1 percent, any municipality in the county could now also impose a 1 percent tax and in doing so not impose any additional tax burden on its residents (or, to be more precise, on those employed within its jurisdiction). That is, the municipality can in effect transfer the portion of the occupational tax revenues collected within its jurisdiction from the county government to itself. One can also think of this as a sort of revenue-sharing arrangement, where the proceeds of a countywide tax are shared between the county and municipal governments.
This means that a county government, when it imposes an occupational tax, has to anticipate that the revenue thereby produced will come primarily from income produced in the nonmunicipal or unincorporated portions of the county, and that its tax will produce an increase in revenues for the municipalities within its boundaries. This likely creates an incentive for county governments to focus service provision on residents not located in the major cities and towns within their boundaries, which may be quite appropriate. However, insofar as counties are charged with responsibilities that are truly countywide in nature, this arrangement is not conducive to efficient financing.
This section examines in more detail the financing of primary and secondary education in Kentucky. Education finance is a complex subject and it is intimately connected to education policy in general. The discussion below unavoidably and deliberately draws attention to a number of educational-policy issues, but maintains a focus on fiscal policy and certainly does not purport to provide a complete treatment of educational policy in Kentucky, which would go far beyond the scope of the present study.
The financing of elementary and secondary education in Kentucky is very much a shared function of the state, acting principally through the Department of Education, and of the local school districts, of which there are some 176. Education finance in Kentucky was affected in a major way in 1990 with the passage of the Kentucky Education Reform Act (KERA), which included extensive provisions for state financial aid to local school districts, particularly through the program known as SEEK (Support Educational Excellence in Kentucky). In addition to state government financing through SEEK, local school districts also obtain funding from their own sources, principally local property taxes, occupational license taxes, and utility gross receipts taxes. A comparatively small amount of revenue is obtained from the federal government. Overall educational funding has grown quite significantly in the decade since KERA, with an especially large increase in local revenues. Total spending in 2000 amounted to about $3.8 billion, of which the state contributed about $2.1 billion, or somewhat more than half.
For a broad sketch of the sources of school funding and their trend over time, see Figure 29. As this figure makes clear, local schools in Kentucky have depended very substantially on state government funding during the past decade, and only slightly on federal government funds.
Figure 29: Kentucky School District Revenue by Level of Government, 1990-2000
Figure 30 reveals more clearly the relative contributions of each level of government to local school finance. It is apparent from Figures 29 and 30 that most of the funding for local education comes not from local resources but from the state government, and that this has been true for quite some time. Federal funds, though not insignificant, contribute comparatively little to the funding of local schools, and are quite stable at about 10 percent of total revenue. One noteworthy trend displayed in Figure 30 is the steady decline in the relative importance of state funding and the corresponding growth in reliance on local revenue sources.
Figure 30: School District Revenue by Level of Government, Percent Contribution, 1999-2000
In order to understand better the relative role of state and local revenue sources in financing education, it is necessary to review the SEEK program through which revenue is transferred from the state to the local school districts and to describe in some detail the revenue instruments available to local school districts.
As will be described further below, the SEEK program does not merely determine the amount of educational funding that is distributed to localities, it also affects local funding by affecting the incentive to use local revenue sources. Aside from the overall state-local mix of revenues in educational finance, another key question concerns the local revenue instruments themselves. Do these taxes distort economic behavior? Are they fair? Can local districts use them to meet pressing financial needs? Before attempting to evaluate the system as a whole, some discussion of its component parts is in order.
The SEEK program distributes funds to local school districts according to a somewhat involved formula, not all details of which are relevant here.(93) The key features of the program, distilled to its simplest form, are (1) the SEEK “base” level of funding and (2) a two-tier system that governs funding about the base level.
The SEEK Base. For each school district, a base level of funding is determined; to a first approximation, this is a uniform statewide level of funding per student. This base level is achieved through a combination of state and local funding. First, each local district is required to impose a local property tax of at least 30 cents per $100 of assessed valuation, i.e., a tax rate of 0.3 percent on property value. The state then supplements this local revenue with transfers that enable each district to achieve the base level of spending per pupil. The base level of transfers from the state depends on how much revenue is produced by the local property tax, irrespective of the use of other revenue sources.
Tier I: 100-115 percent of the SEEK Base. Any school district that elects to exceed the base level of funding by as much as 15 percent is permitted to do so by levying property taxes at rates above the 0.3 percent requirement. Some districts, of course, are “property poor” in the sense that they have relatively little assessed property value per pupil, while others are “property rich.” For most school districts operating in the Tier I range (between 100 percent and 115 percent of the SEEK base revenue per pupil), the increase in revenues from higher property tax rates are augmented with additional funds from the state according to an “equalization” formula. These funds are determined in such a way that an increase in the local property tax rate in any district will increase revenue by the same amount as would have been obtained if the district’s assessed property valuation per pupil were equal to 150 percent of the statewide average.(94) The amount of additional state support obtained in this fashion, of course, is relatively modest for “property-rich” school districts but more substantial for “property-poor” ones.(95)
Tier II: 115-130 Percent of the SEEK Base. School districts are permitted to use local revenue sources to increase funding beyond 115 percent of the SEEK base. The state does not, however, provide any additional support for such districts, so any additional revenue that they obtain in excess of the Tier I level must come entirely from local sources. With some exceptions, school districts are not allowed to raise local revenues beyond 130 percent of the SEEK base, however. In other words, local tax effort to increase school funding is subject to a regulatory cap. The principal exception to this rule is a “grandfather” clause in KERA, according to which no school district would be required to reduce its educational spending. Thus, districts with initially high levels of education spending are permitted to exceed the Tier II cap. At present, some school districts do exceed the Tier II maximum level of spending, as shown in Figure 31.
Figure 31: School District Funding as Percent of Adjusted SEEK Base 2000 SEEK Funding
In summary, from the viewpoint of tax analysis, the crucial elements of the SEEK program are: (1) a minimum property tax requirement for all districts, (2) added financial incentive for modest increases in local tax effort above the minimum with equalizing components built in (Tier I), (3) a range of revenues over which local districts are “on their own” (Tier II), and (4) a cap on local tax effort (130 percent of SEEK base) with special exceptions for a handful of districts.
The main revenue instruments available to local school districts are the property tax, the utilities gross receipts tax, and the occupational tax.
The Property Tax. First, school districts are permitted, and to some extent required (in order to achieve the SEEK base level of funding), to use local property taxes. As previously discussed, they are subject to the same HB 44 limitations on annual property-tax revenue growth as other local governments. Like other localities, school districts can exceed HB 44 limits, though possibly subject to special approval by the voters. Thus, as for other localities, HB 44 may raise political barriers to tax increases but does not put any absolute limit on the amount of revenue that can be raised from the property tax. However, school districts are subject to strict expenditure limits which do not apply to other localities: any tax increase must not permit revenue growth in excess of the Tier II limit described above, even if local voters are willing to approve higher taxes.(96)
Utilities Gross Receipts Tax. Over 150 school districts use the “utilities gross receipts” tax, a tax on the revenues derived within a locality from telephone services, electrical power, water, gas, cable television, and related services. State law limits the rate of this tax to 3 percent. At the present time, all but 22 of Kentucky’s school districts impose this tax, and in only four of these districts does the tax rate fall short of the 3 percent maximum. As shown in Figure 32, this tax accounts for a significant share of school district revenues, amounting to some 10 to 30 percent of revenues for about 140 of the state’s school districts.
Since the tax is imposed at its maximum rate of 3 percent in almost all districts, it is, in effect, a statewide levy at a 3 percent rate on utilities, with the revenues accruing to local school districts in proportion to the amount of local utilities revenue. Viewed in this way, it complements the state sales tax by including within the sales tax base some intangible items that would otherwise not be subject to sales tax. If one favors a broad-based sales tax, the utilities gross receipts tax has the virtue that it broadens the base, though the 3 percent limit implies that that portion of the base is taxed preferentially relative to the standard tangible-goods tax rate of 6 percent. Unlike the state’s general sales tax, the revenues from the utilities gross receipts tax are earmarked for education. Again unlike the general sales tax, the revenue is distributed to the localities where taxable purchases occur, i.e., the localities.
Occupational License Tax. The occupational license tax is another potential source of revenue for school districts, one which is utilized heavily by a handful of districts and not at all by most. Jefferson County obtains over 25 percent of its local revenues from this source, and it accounts for 10 percent or more of local revenues for several other districts. However, only 8 districts in the entire state use this tax. The rate of taxation is limited. For school districts in counties with populations over 300,000 (i.e., only in Jefferson County), the tax rate may be as high as 0.75 percent, whereas for districts in less populous counties, it is limited to 0.5 percent. In those few districts that utilize this revenue source, it produces a significant share of the local financing for education, as shown in Table 15. Boone, Cumberland, Fayette, Scott, and Warren counties impose this tax at the maximum allowable rate of 0.5 percent.
Table 15: Occupational License Tax Revenue Collected by School Districts
Summary. To summarize some salient points from this overview, we note the following:
Fundamental Educational Reform: Public Support for Children or for Schools? Systems of educational finance are always candidates for reform, simply because education policy itself is an important and complex matter. Serious reform proposals should begin with an analysis of fundamental educational goals, on the basis of which rational analysis of funding can begin. There has been an ongoing national debate about the provision and financing of education for a number of years, and Kentuckians may or may not decide to alter the current educational system in major ways. There is presumably broad consensus that primary and secondary education should be generally available to the children of the state. There is probably widespread agreement that the educational opportunities of poor or otherwise disadvantaged children should not be unduly constrained by family circumstances or place of residence. Beyond these basic premises, there is much scope for debate.
To begin with perhaps the most basic question, one may ask what role private schools can or should play in the state’s educational system. Public provision of education is frequently supported on the grounds that it is available even to children from poor families who would not otherwise be able to afford education. An alternative and much-debated approach would allow parents to send children to private schools with financial assistance from state or local governments through vouchers, tax credits, or by other means. One simple option would be to allow a per-pupil allowance, like the SEEK per-pupil base amount ($3,046.33 for 2000-2001), to “travel” with a student and to be made available in whatever school a student attends. If desired, this allowance could be made available only to students from poor families. This amount of funding might be insufficient for some families to take advantage of private schools, but it would undoubtedly result in an increase in private-school attendance and a reduced reliance on public schools. It would not require any change in the amount of state and local tax revenues devoted to education. However, if the essential goal of a fixed per-pupil allowance is to achieve basic equity by ensuring that some level of education is made available to all children, or to poor children, it might also be argued that there is no reason why such allowances should be funded from local sources at all, or from a mix of state government revenues and local property taxes. Other programs that promote equity or redistributive objectives, such as the state’s welfare and health care programs, are not funded from local sources. Why should those elements of the educational system that aim to transfer resources in favor of the poor be financed differently from other redistributive programs?
Even if public resources are strictly denied to families whose children attend private schools, the relative importance of public and private education may well shift over time. Parents dissatisfied with public education always have the option, at their own expense, to withdraw children from public schools. The extent to which this option is exercised will vary, depending in part on the quality of public schools. This possibility is discussed further below.
Equity and Efficiency in Public School Finance. Concerns about fairness in the provision of education, and about the role of education in giving young people a fair chance in life, are perhaps the driving force behind public-sector involvement in education. Concerns about differences in the capacity or willingness of different localities to support education are probably the driving force behind state government involvement in the financing and regulation of local schools. Some localities may have more wealth or income than others and their residents may wish to use some of their additional income to support local schools. Other localities may make education a higher priority in local tax and spending decisions, independently of their wealth or income levels. For example, voters in a community with many young families may be more willing to support higher taxes for schools than one with few children of school age. Voters in a community in which many families use private schools may find that local public education garners less support than otherwise. Parents may place a higher priority on education for their children in regions of the state where the demand for educated workers is high. High-quality education may simply be a norm or tradition in some parts of the state but not in others. For these and a host of other reasons, the local demand for public education varies among local school districts, and the level of education spending chosen by autonomous school districts must therefore also be expected to vary. Because local demands for education vary, the efficient level of provision of public education differs among school districts, and the amount of resources that school districts will choose, if allowed to do so, will vary.
Is it fair or equitable for some districts to spend more on education than others? Views on this question vary. Many would argue that the state government should support school districts that are “resource-poor,” that is, districts that have low amounts of taxable property or other resources in relation to the number of students in public school.(97)
Even with state support for “resource-poor” districts, however, some districts are likely to spend more than others. Indeed, the experience since KERA has shown that spending levels per pupil continue to vary among school districts in Kentucky, though most of the spending variation is within the bounds of the Tier II range under the SEEK program. Apparently in order to limit variations in spending still further, or perhaps to strengthen the hand of local taxpayers who wish to resist higher spending on education, the SEEK program puts a cap on the amount that a district can spend (130 percent of the SEEK base), and there are some districts for which this limit appears to be “binding,” that is, districts that might be able to secure voter approval to raise local taxes in order to achieve higher spending levels, but are prohibited from doing so.(98)
Some Policy Options. In order to sharpen the policy issues, it is useful to consider some stark policy options.
1. Elimination of Local School Districts. If equity in public education is interpreted to mean that education spending per pupil must be identical throughout the state, and if equity in this sense is given priority over all other educational objectives, then local school districts should have no fiscal autonomy whatsoever. Uniform per-pupil expenditures would likely best be achieved by abolishing local school districts. State authorities could then determine the level of per-pupil expenditures, presumably at the level of individual schools throughout the state. In this scenario, state authorities would also determine the appropriate types of taxes, and tax rates, to be used in financing public schools. Statewide property taxes might be used for this purpose, but only insofar as this promotes a more efficient or equitable tax system for the state as a whole.
It is of course impossible to know exactly what uniform level of education spending the state government would choose, but it is quite reasonable to assume that this level would lie somewhere between the highest and lowest levels of expenditures now observed in individual local school districts. Per-pupil expenditures would thus be increased in some schools and decreased in others. This outcome would be inefficient because spending levels in some schools would exceed the amount that parents and other beneficiaries of education would willingly pay and in other schools would fall short of that amount. Those for whom the level of education falls too far below their desired level would still have the opportunity to opt out of the public educational system (unless this were somehow prohibited, in which case the only remaining option for high-demanders would be to leave the state), and it is reasonable to suppose that the number of children in private schools would increase significantly in this case. Since the parents who would switch to private schools would likely desire higher levels of education for their children, the level of political support for public education would be expected to diminish: parents who would support high levels of public education spending when their children are enrolled in public schools would be much less likely to do so when their children attend private schools. Taking this effect into account, the statewide uniform level of public education spending would tend to be lower than otherwise, especially as private school opportunities gradually expand in response to increased demand.
Under this scenario, then, one could anticipate that uniformity in public education would result in efficiency losses as the level of education provision fails to reflect diverse demands but a gain in equity, at least in the distribution of public educational resources. Utilization of private educational options would be expected to increase, with private schools especially serving parents with high educational demands and offering a wider diversity of educational experiences than the public schools.(99)
2. Elimination of State Involvement in Education. At the other extreme, one could leave each locality to decide how much to spend on local schools and how to finance these expenditures. Education expenditures in resource-poor localities, or in localities that for other reasons have low demands for education, would be relatively low, while expenditures in richer localities, or in localities that have higher demands for education for other reasons, would be high. This outcome would allow for the greatest amount of adaptation of local policies to diverse demands, improving the efficiency with which education is provided. The demand for private education would diminish, since public schools would offer a wider spectrum of choice. Of course, the wide variations in educational expenditures under this scenario would likely be widely viewed as inequitable.
3. Blending State and Local Participation. Neither of the polar extremes outlined in (1) or (2) is likely to be appealing. Current policy reflects the tension between the two: local school districts are allowed some degree of autonomy in setting expenditure and tax policies, but their ability to do so is regulated and the state government finances a large fraction of local spending, presumably resulting in greater uniformity in the provision of education throughout the state. The statewide minimum 0.3 percent property tax levy; the SEEK base level of revenues per pupil; the limits on property, utilities, and occupational taxes; the equalization component of the SEEK formula; and the statewide cap on per-pupil expenditures all potentially contribute to greater uniformity in expenditures per pupil. It is very difficult to ascertain what the real effects of this extremely complex arrangement may be, however.
As already discussed, the combination of local tax effort and SEEK funding has moved all school districts beyond the Tier I range of per-pupil expenditures, establishing an effective statewide minimum. In the Tier-II range, incremental expenditures are financed from local sources. At the margin, then, it appears that the SEEK system is not encouraging most local districts to spend more on education; rather, its principal effect is probably (a) to substitute state funds for local revenues, increasing the overall amount of personal income and sales taxes paid by Kentuckians and reducing the amount paid in local property and other taxes, and (b) to redistribute income from residents of school districts with high amounts of property valuation per pupil to those with low amounts. These effects may or may not be desirable, but in any case they are rather incidental to education policy, and it is worth considering whether they constitute important policy objectives in themselves.
There are several school districts that appear to be at or near the absolute limits of per-pupil expenditures allowed under the SEEK program. If greater uniformity of expenditures is desired, these limits could be tightened, reducing the amount of spending in districts at the upper end of per-pupil expenditures. The equity case for holding down school expenditures seems to be much weaker than that for ensuring that statewide minimum spending levels are attained, however. On efficiency grounds, such limits may be harmful.
Assuming that some reliance on local tax effort and some variation in local spending is to be allowed, one can ask whether the revenue instruments available to local school districts are appropriate. The property tax and the occupational income tax both offer local districts the potential to raise significant amounts of local revenues. Whether either should be subject to limits on allowable tax rates or on annual tax revenue growth is certainly questionable. In the case of the occupational tax, the limits appear to be irrelevant in most cases, since very few districts have chosen to utilize this tax to the maximum extent allowed. In cases where these limits do actually constrain local educational spending, the important questions to ask are whether additional educational spending and additional taxation imposes harm on the rest of the state, and whether they cause inequities. In general, it would appear that most of the benefits and costs of increases in education spending fall on local residents and that there is little harm done to the rest of the state when a locality’s residents elect to tax themselves more heavily in order to spend more on local schools. On equity grounds, the issue of primary concern is presumably educational expenditures rather than tax burdens, and tax limits are not likely to provide an effective way to limit expenditure variations.
To illustrate this point, consider the situation of the five school districts which, in 2000, were applying the highest allowable occupational and utilities tax rates. One might anticipate that districts that are utilizing these taxes to the maximum degree might have unusually high levels of per-pupil spending. In fact, as Table 16 shows, these districts do actually raise substantially more per-pupil revenues ($2,854) than other school districts in the state ($1,705). However, these districts receive less in state support than others ($3,234 vs. $4,203 for other districts), so, in the end, the total revenues per pupil in these districts are almost identical to (actually, slightly less than) the statewide average. For these school districts, at least, higher local occupational and utilities taxes have not resulted in higher expenditures per pupil. The caps on occupational taxes and utilities taxes are potentially limiting the amount of revenues raised within these districts, and removal of these caps might allow them to increase their local revenues. These districts, on average, are not at the upper end of per-pupil expenditures in the state, and it appears therefore that these particular tax rate limits are not contributing to greater equality of per-pupil spending.
As a final observation, the utilities gross receipts tax appears to be a rather odd instrument for the financing of local education. Since it is in practice imposed at its maximum 3 percent rate almost everywhere in the state, it does not provide a means by which local districts can expand their expenditures at the margin. Arguably, the 3 percent limit should be eliminated so as to increase the ability of school districts to respond to local demand. However, local variations in the utilities tax would create substantial administrative and compliance difficulties for taxpayers; furthermore, the tax is not very transparent and bears little relationship to the activities that it is financing. A better alternative might be to remove the local utilities tax altogether and replace it with a state-administered tax at a uniform rate of 3 percent or perhaps at the general sales tax rate of 6 percent, using the additional state revenues for general state purposes or possibly including this revenue in the transfers made by the state government to local school districts. The case for elimination of the local utilities tax would be strengthened if it were accompanied by relaxation on local use of other major revenue sources, especially the property and occupational taxes, so that local districts would be able, if desired, to make up lost utilities tax revenues from other sources.
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85 When a manager directs a worker to stay on the job from 8:00 until 5:00, or a consumer walks out of a bakery with a loaf of bread, the manager or consumer affects the well-being of the worker or of the bakery-owner. But these are not “externalities” because the manager must obtain the consent of the worker by offering adequate remuneration and the consumer must obtain the consent of the bakery-owner by paying the stated price for a loaf of bread. Externalities are so called because they are “external” to normal contractual relationships. Building a noxious facility without the consent of neighboring landowners is one example of an externality; the decision by one county to operate a landfill in a location that pollutes the groundwater of a neighboring county, without compensating it or otherwise obtaining its consent, is another. Return to text.
86 To take just one illustration, there are stronger incentives to develop rural land if the cost of public service provision associated with such development (including not only land-development costs proper, but any services provided to local residents, such as education) is borne by state taxpayers rather than local residents. Return to text.
87 As discussed further below, there may be other restrictions on the ability of local school districts to raise property taxes, even if voter approval could be secured. Return to text.
88 Because the 4 percent annual growth limitation is stated in nominal rather than real terms (i.e., it is not inflation-adjusted), these impacts might be particularly pronounced during periods of high inflation. Indeed, HB 44 was enacted during an inflationary episode. However, inflation has proceeded at a relatively modest rate since the early 1980s, so this particular aspect of the operation of HB 44 has not been as critical as might otherwise have been the case. The fact that the 4 percent limit is not inflation-indexed does mean, however, that the real impact of the law could be much more significant during a time of rapidly-rising prices. Return to text.
89 More precisely, the figure shows the growth in property tax revenues exclusive of growth attributable to new property. Thus, 0 percent growth, for example, means that a county applied the compensating tax rate to its assessed valuation. Actual property tax revenues could still vary because of variation in assessed valuation. Return to text.
90 While few counties seem to be subject to HB 44 limits with any frequency, there certainly can be, and are, exceptions. Hopkins County was at the HB 44 limit for each of the years 1998-2000. I am grateful to Hopkins County Fiscal Court Judge R. L. Frymire for informative communications about Hopkins County and about the financing and functions of county governments in Kentucky generally. Return to text.
91 This table only provides a basic outline of the rules governing local taxes. The Kentucky Revised Statutes may be consulted for additional details. Return to text.
92 Since the financing of local school districts is treated in more detail in the next section, the following remarks focus on municipal and county governments. Return to text.
93 The SEEK formula makes special allowances for “at-risk” and “exceptional” (disabled) children, for transportation needs, and for students at home or in hospitals. These are among the complexities that are ignored in the following discussion. Return to text.
94 For example, a property-poor district, with an assessed valuation per pupil equal to only 75 percent of the state average, would obtain $1 of additional state funding for $1 of additional property tax revenue that it collects, so that the effective local yield from higher tax rates is the same as if the district were property rich, with 150 percent of the statewide average assessed valuation. Return to text.
95 There are six school districts for which the level of assessed property value is greater than 150 percent of the statewide average and which, accordingly, do not qualify for Tier I funding: Anchorage Independent and the districts of Boone, Campbell, Fayette, Jefferson, and Kenton Counties. At present, every school district in the state exceeds the Tier I cap of 115 percent of the SEEK base level of revenue per pupil. Return to text.
96 The statutory language is clear: KRS 157.440(2) states that local taxes can be increased with the approval of the district’s voters, but “[t]he rate that may be levied under this section may produce revenue up to no more than 30 percent of the revenue guaranteed by the program to support education excellence in Kentucky plus the revenue produced by the tax authorized in this section.” Return to text.
97 In the SEEK program, a district’s resources are measured principally by its assessed property valuation per pupil, a measure that has at least superficial appeal given that property taxes are one important source of school funding. Other sources of funding are also important, however, and other measures of a school district’s capacity to finance education might well be preferable. These issues warrant additional analysis and discussion but go beyond the scope of this study. Return to text.
98 The Beechwood Independent School District is an interesting case in this respect. This district spent $6,339 per pupil in 1999-2000, slightly below the state per-pupil average of $6,783. It has sought authorization from the Kentucky Department of Education to hold a special election at which voters could decide whether to increase property tax rates by 18 cents per $100 of assessed valuation, a tax increase which would cause local revenues to exceed the limits imposed under KERA/SEEK. The KDE has indicated that it would be impermissible for the district to increase taxes by this amount, although the voters could, if desired, approve an increase in taxes (up to 14 cents per $100, in this particular instance) that would keep revenues within these limits. (I am grateful to Dr. F. Bassett, the Superintendent of the Beechwood district, for providing helpful information on this case.) Return to text.
99 The interplay between private and public educational systems is complex and not fully understood. To cite one importance case, gradually-accumulating evidence suggests that a 1973 decision by the California Supreme Court, mandating greater uniformity in school funding, led to a much larger role for the state government in school finance. This may have contributed to political support for Proposition 13, a well-known property-tax limitation measure. Erosion of local financing for schools and greater uniformity in spending then seems to have contributed to a decline in per-pupil expenditures in California relative to the rest of the country and to growth in private-school enrollments during the 1980s and 1990s. Similar findings have been reported for other states. Return to text.