Request By:
Ms. Anne Gabbard
Council Member, Fourth District
Lexington-Fayette Urban
County Government
Office of Urban County Council
The Municipal Building
136 Walnut Street
Lexington, Kentucky 40507
Opinion
Opinion By: Steven L. Beshear, Attorney General; By Alex W. Rose, Assistant Attorney General
This is in response to your letter in which you requested an opinion as to whether local governments, such as the Lexington-Fayette Urban County Government, are forever prohibited by House Bill 44 from setting a property tax rate higher than the rate of the preceding year.
That portion of House Bill 44 enacted by the General Assembly at the 1979 Special Session restricting the ability of city and urban-county governments to increase their property tax rates was codified in KRS 132.027. The statute is comprised of three separate and distinct limitations with which a city or urban-county government must comply when levying its property tax rate each year. The answer to your question involves the legal effect of the maximum rate limitation contained in KRS 132.027(1) which provides as follows:
"(1)(a) Notwithstanding any statutory provisions to the contrary, no city or urban-county government shall levy a tax rate for 1979-80 which will produce more revenue, exclusive of revenue from net assessment growth, than would be produced by application of the maximum tax rate that could have been levied in 1978-79 to the 1978-79 assessment.
(b) In succeeding years, no city or urban-county government shall levy a tax rate which will produce more revenue, exclusive of revenue from net assessment growth, than would be produced by application of the tax rate that was levied in the preceding year to the preceding year's assessment."
An interpretation of the phrase "exclusive of revenue from net assessment growth" is crucial to a complete understanding of the legal effect of the maximum rate limitation. If KRS 132.027(1) had been enacted without that phrase, the maximum rate which a city or urban-county government could levy would be that rate which, when applied to its current year assessments, would produce the same amount of revenue that would have been produced the preceding year if all the property taxes actually levied by the city or urban-county government in the preceding year had been collected. By including the phrase in the statute, however, the General Assembly injected into the computation of the maximum rate limitation an additional factor which is based on the taxing authority's net assessment growth.
"Net assessment growth" is defined in KRS 132.010(7) as follows:
"'Net assessment growth' means the difference in the total valuation of property subject to taxation by the county, city, school district or special district in the preceding year, less the total valuation exempted from taxation by the homestead exemption provision of the Constitution in the current year over that exempted in the preceding year, and the total valuation of property subject to taxation by the county, city, school district or special district for the current year. "
Pursuant to this definition, a taxing authority's net assessment growth is determined by three variables:
(1) Fluctuations in the amount of property listed on the taxing authority's tax rolls;
(2) Fluctuations in the valuation of property presently listed on the taxing authority's tax rolls; and
(3) Fluctuations in the taxing authority's adjustments for the homestead exemption.
Depending upon the conditions existing in any particular tax year, the combination of these variables for a taxing authority could result in either a positive or negative net assessment growth. Consequently, to determine the effect of the phrase "exclusive of revenue from net assessment growth" on the maximum rate limitation, the phrase must be considered in both instances of positive and negative net assessment growth.
Where a city or urban-county government experiences a positive net assessment growth, the effect of the phrase "exclusive positive net assessment growth, the effect of the phrase "exclusive of revenue from net assessment growth" on the maximum rate limitation computation is straight forward and susceptible of only one interpretation. In such instances of positive net assessment growth, the phrase requires the taxing authority to compute a rate which will produce the same amount of revenue from the same assessed valuation of all property made in the preceding tax year. The maximum rate is computed without considering the amount of revenue which will be produced when that rate is applied to the positive net assessment growth. Consequently, in years of positive net assessment growth, the maximum rate which city or urban-county government can levy is the rate which is levied in the preceding year.
Where, however, a city or urban-county government experiences a negative net assessment growth, the phrase "exclusive of revenue from net assessment growth" is capable of two separate interpretations which produce two irreconcilable results. One interpretation is that during times of negative net assessment growth, the phrase will always result in a "zero revenue" figure for computation purposes. The other interpretation is that for negative net assessment growth periods the phrase will result in a "negative revenue" figure for purposes of computing the maximum rate limitation. In choosing the proper interpretation of the statute, it is necessary to analyze the basis and result of each respective interpretation.
"Zero Revenue" Interpretation
While a city or urban-county government could very well experience a negative net assessment growth, it is obvious that revenue from a negative net assessment growth is zero revenue, and not negative revenue. The key word in the phrase "exclusive of revenue from net assessment growth" is "revenue". Black's Law Dictionary defines "revenue", in pertinent part, as follows:
"As applied to the income of a government, a broad and general term, including all public moneys which the state collects and receives, from whatever source and in whatever manner.
Fletcher v. Oliver, 25 Ark. 295;
State ex rel. Thompson v. Board of Regents for Northeast Missouri State Teachers' College, 305 Mo. 57, 264 S.W.698, 700. The income which a state collects and receives into its treasury, and is appropriated for the payment of its expenses.
Public Market Co. of Portland v. City of Portland, 171 Ore. 522, 130 P.2d 624,644. (Emphasis added)
In the above-quoted definition, revenue is income. The application of any rate levied against a negative net assessment will produce no income, or zero revenue. It will not produce an expense, or negative revenue.
Should the phrase "exclusive of revenue from net assessment growth" be interpreted in such a way as to produce a negative revenue in years of negative net assessment growth, the maximum rate which a city or urban-county government could levy would always be the rate levied in the preceding year. If the General Assembly had intended such a result, it could have so stated in less ambiguous language.
If a city or urban-county government could never levy a higher rate than the rate it levied in the preceding year, in times a severe economic depression when property values decline drastically, the revenue of a city or urban-county government could be decreased to the extent that it could not provide necessary governmental services. Such a result is contrary to the expressed intention of the General Assembly in enacting House Bill 44. In the preamble to House Bill 44, (Kentucky Acts 1979, Chapter 25) the General Assembly stated as follows:
"WHEREAS, the General Assembly intends in enacting this Act to reduce the impact of inflation on property taxes, both state and local, without reducing necessary governmental services;
NOW, THEREFORE,
Be it enacted by the General Assembly of the Commonwealth of Kentucky: . . ." (Emphasis added)
In addition, an interpretation of KRS 132.027(1) which in times of depression would result in a decrease of a city or urban-county government's revenue to such a level that it could not provide necessary governmental services would be in violation of the Kentucky Constitution. In
Fulton County Fiscal Court v. Southern Bell Telephone and Telegraph Company, 285 Ky. 17, 146 S.W.2d 15 (1940), the Court, at page 24, stated as follows:
"We have always held that every taxing unit must assure the payment of expenses of the usual and current administration of the government which it was organized to provide; that such is the imperative implication of the constitution as a whole. " (Emphasis added)
In
Board of Trustees v. Kercheval, 242 Ky. 1, 45 S.W.2d 846 (1931), the Court, at page 847, stated as follows:
" The law will not be construed in such manner as to destroy the machinery of government (
City of Williamsburg v. Weesner, 164 Ky. 769, 176 S.W. 224), but an interpretation will be adopted that promotes the orderly functioning thereof." (Emphasis added)
Consequently, where a city or urban-county government experiences a negative net assessment growth, the phrase "exclusive of revenue from net assessment growth", will have no effect on the computation of the taxing authority's maximum rate since the revenue from a negative net assessment growth is zero. The maximum rate will be computed as if the phrase was not included in the statutory language of KRS 132.027(1). Therefore, in a year of negative net assessment growth, the maximum rate which a city or urban-county government can levy is that rate which, when applied to its current year assessments, will produce the same amount of revenue that would have been produced in the preceding tax year if all the property taxes the city or urban-county government actually levied had been collected. In such an instance, the maximum rate as provided in KRS 132.027(1) would be greater than the rate levied in the preceding year.
"Negative Revenue" Interpretation
House Bill 44 was enacted during a period of severe inflation. The "evil" addressed by the bill was the impact of that inflation on property taxes. See the preamble to House Bill 44, Kentucky Acts 1979, Chapter 25 quoted above.
It is obvious that the legislators did not consider the possible loss of the tax base to local taxing authorities through a severe depression. The drafters of the bill and the legislators who enacted it, however, did consider the possible decrease in a local taxing authority's tax base due to the loss of taxable property. Such losses of property could occur though the annexation of property by another taxing authority, destruction of improvements on taxable property, or other unforeseen contingencies. These losses of taxable property would result in a decrease in the demand for necessary governmental services to be provided by the taxing authority as opposed to a mere decrease in assessed valuation. The General Assembly intended to limit the ability of a local taxing authority to produce the same amount of revenue in taxable years subsequent to the loss of taxable property since the services it would have to provide would decrease.
If a local taxing authority could levy a rate in years subsequent to the loss of taxable property that would produce the same amount of revenue as was produced in the year prior to the loss it would not be required to hold a public hearing as provided in KRS 132.027(3) nor would the levy be subject to a recall vote pursuant to KRS 132.027(4). The limitation provisions contained in KRS 132.027(3) and 132.027(4) are based upon the compensating tax rate which is defined in KRS 132.010(6). That definition contains a provision which reads as follows:
"However, in no event shall the compensating tax rate be a rate which, when applied to the total current year assessment of all classes of taxable property, produces an amount of revenue less than was produced in the preceding year from all classes of taxable property. "
Consequently, the only means to control the ability of a local taxing authority to levy a rate which would require the remaining taxpayers to absorb the taxes formerly paid by the owners of the lost property would be to interpret the phrase "exclusive of revenue from net assessment growth" in such a manner that it would produce a negative revenue figure for computing the maximum rate limitation during periods of negative net assessment growth.
In
Hopkins v. Dickens, 188 Ky. 368, 222 S.W. 101 (1920), the Kentucky Supreme Court (then the Court of Appeals of Kentucky), at page 104, stated as follows:
"A well-known rule of construction of an ambiguous statute is that when the intention of the Legislature is obvious, but the language used, if given its literal meaning, will defeat the intention, the real purpose of the Legislature should be allowed to prevail over the literal import of the words." (Citations omitted)
The Correct Interpretation
It is our opinion that the correct interpretation of the phrase "exclusive of revenue from net assessment growth" is that during times of negative net assessment growth the phrase will always result in a "zero revenue" figure for purposes of computing the maximum rate limitation provision contained in KRS 132.027(1). The "zero revenue" interpretation is based upon the literal interpretation of the statutory language, expressed legislative intent and constitutional considerations while the "negative revenue" interpretation is based solely on implied legislative intent.
Although the "zero revenue" interpretation would enable the officials of a taxing authority to increase property tax rates in years of negative net assessment growth caused by losses in taxable property without regard to the limitations contained in KRS 132.027(3) and KRS 132.027(4), the taxpayers would be able to exert control over such irresponsibility by exercising their voting privileges. If the "negative revenue" interpretation were adopted, however, no safeguard would be available for those years in which a local taxing authority's tax base is decreased through depressed economic conditions to the point where it cannot provide necessary governmental services. In
Pewee Valley Fire Protection District v. South Oldham Fire Protection District, Ky.App., 570 S.W.2d 290 (1978), the Court of Appeals of Kentucky, at page 292, stated as follows:
"In attempting to interpret the meaning of the statute and the legislative intent, the court must give a construction that is reasonable and will reflect the public will.
Commonwealth ex rel. Breckinridge v. Marshall, Ky., 361 S.W.2d 103 (1962). Courts must also give statutes a practical construction.
Hamilton v. International Union of Operating Engineers, Ky., 262 S.W.2d 695 (1962). We presume that the legislature did not intend to reach an absurd result. Valla v. Preston Street Water District No. 1 of Jefferson County, Ky., 395 S.W.2d 772 (1965)." (Emphasis added)
An interpretation of a statute which could possibly destroy the very foundation of a local government is not reasonable and certainly does not reflect the will of the public.
The purpose of the maximum rate limitation provision in KRS 132.027(1) is to ensure the ability of a city or urban-county government, with the approval of its citizens, to levy a rate sufficient to maintain its governmental services at a level comparable to the services provided in its 1978-79 fiscal year. Therefore, where a city or urban-county government experiences a positive net assessment growth, its maximum rate will be the rate levied the preceding year. In years of negative net assessment growth, however, the maximum rate which a city or urban-county government can levy is that rate which, when applied to its current year assessments, will produce the same amount of revenue as would have been produced in the preceding year if all the property taxes levied by that particular city or urban-county government had been collected.
As previously stated, KRS 132.027 is comprised of three separate and distinct limitation provisions. The maximum rate limitation contained in KRS 132.027(1) provides a ceiling above which a city or urban-county government is prohibited from increasing its property tax rate. The remaining two limitation provisions impose restrictions on the ability of a city or urbancounty government to increase its rates within the maximum limitation imposed by RKS 132.027(1).
KRS 132.027(2) establishes a limit above which a city or urban-county government is prohibited from increasing its rate unless a public hearing is held, in compliance with the provisions of KRS 132.027(3), to hear comments from the public regarding the proposed increase. Subsection (2) reads as follows:
"No city or urban-county government shall levy a tax rate within the limits imposed in subsection (1) of this section which exceeds the compensating tax rate defined in KRS 132.010 defined in KRS 132.010 until the city or urban-county government has complied with the provisions of subsection (3) of this section." (Emphasis added)
This limitation is dependent upon the compensating tax rate which is defined in KRS 132.010(6) as follows:
"'Compensating tax rate' means that rate which, rounded to the next higher one-tenth of one cent per one hundred dollars of assessed value and applied to the current year's assessment of the property subject to taxation by a taxing district, excluding new property and personal property, produces an amount of revenue approximately equal to that produced in the preceding year from real property. However, in no event shall the compensating tax rate be a rate which, when applied to the total current year assessment of all classes of taxable property, produces an amount of revenue less than was produced in the preceding year from all classes of taxable property. For purposes of this subsection, 'property subject to taxation' means the total fair cash value of all property subject to full local rates, less the total valuation exempted from taxation by the homestead exemption provision of the Constitution and the difference between the fair cash value and agricultural or horticultural value of agricultural or horticultural land."
KRS 132.027(4)(a) provides a limit, also based on the compensating tax rate, above which any rate levied by a city or urban-county government would be subject to a recall vote or reconsideration by the city taxpayers. That statute reads as follows:
"(4)(a) That portion of a tax rate levied by an action of a city or urban-county government which will produce revenue from real property, exclusive of revenue from new property, more than four percent (4%) over the amount of revenue produced by the compensating tax rate defined in KRS 132.010 shall be subject to recall vote or reconsideration by the taxing district, such as the case may be, as provided for in KRS 132.017, and shall be advertised as provided for in paragraph (b) of this subsection."
Any rate increase by a city or urban-county government must comply with all three limitations set forth in KRS 132.027. If the city or urban-county government complies with the applicable procedures contained in KRS 132.027(3) and/or KRS 132.027(4)(b), however, it may increase its property tax rate to the maximum as provided in KRS 132.027(1).