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Inclusion of Personal Property is Needed in Calculating the Compensating Tax Rate to Trigger KRS 68.245(6)

08.25.2010

In Ky. OAG-10-005 (Jun. 14, 2010), the Attorney General opined that in calculating the compensating tax rate, personal property must be included when applying a tax rate to “all classes of taxable property,” as is required by KRS 132.010(6). The Opinion was issued in response to a request by for an opinion pursuant to KRS 15.025(3) as to the proper method of calculating real property tax rates under KRS 132.010. This request was advanced on behalf of Boone County Property Valuation Administrator Cindy Rich and Boone County Fiscal Court Fiscal Court Commissioner Cathy Flaig. The request specifically asked whether personal property should be included in the “compensating tax rate” equation.

KRS 68.245(6) provides that a property tax rate levied by a county fiscal court is subject to a recall vote to the extent that it “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.” Therefore, the right to a recall petition under KRS 68.245(6) will be triggered only when a real property tax rate exceeds, by more than four percent (4%), the “compensating tax rate.” KRS 132.010(6) lays out the two step-process for calculating the compensating tax rate:

  • Step 1: The compensating tax rate which, rounded to the next higher one-tenth of one cent ($.001) per one hundred dollars ($100) 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.
  • Step 2: 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.

The compensating tax rate is computed and certified for each of Kentucky’s 120 counties by the local finance officer by June 30 of each year, pursuant to KRS 68.245(3)(a), after the PVA has submitted an official estimate of property assessments as required by KRS 68.245(1). On the basis of that computation, the rate which will produce only four percent (4%) more revenue from real property than the compensating tax rate is also calculated and certified to each county by the local finance officer pursuant to KRS 68.245(3)(b). Counties are free to levy the compensating tax rate without restrictions. KRS 68.245(2). Any levy of more than four percent (4%) above the compensating tax rate is subject to a recall petition under KRS 132.017.

The questions presented to the Attorney General were two fold: 1) should assessments of personal property be included with the assessments of real property when calculating the compensating tax rate applicable to real property under 132.010(6); and 2) if personal property is to be included in the equation, should the real property tax rate be used and thus “ignore” the personal property rate when that rate exceeds the real property rate, as is common practice?

The Attorney General stated that because the language of KRS 132.010(6) and KRS 68.245(6)(a) is unambiguous, there is no need to resort to statutory construction principles. Autozone, Inc. v. Brewer, 127 S.W.3d 653, 655 (Ky. 2004) (generally a statute is open to construction only if the language that is used is ambiguous and requires interpretation). Therefore, after a simple reading of the express language of KRS 132.101(6), the Attorney General quickly concluded that the two questions it was presented with could be answered by simply reading the language of the two-step process (listed above) for calculating the compensating tax rate.

With regard to the first question, the Attorney General concluded that based on a plain reading of the statute, it is proper to include personal property in calculating the compensating tax rate when KRS 132.010(6) requires the inclusion of “all classes of taxable property” in the second step of the process. As for the second question, the Attorney General concluded that it was proper to “ignore” the personal property tax rate when KRS 132.010(6) requires the calculation of a rate based on real property alone.

The position in this request was that the rate identified in the first step of the process was the “true” compensating tax rate because when one uses the real property tax rate only in the second step (because the personal property rate was higher), the second step will give a “false” result that would result in a loss of one’s recall rights under KRS 132.010(6). However, the Attorney General quickly shot down this argument by stating that the “true” compensating tax rate is not arrived at until the two-step calculation is completed. According to the Attorney General’s Opinion, there is nothing to indicate that the General Assembly intended to create a “4% limit on rate increases.”

The Attorney General further noted that the first-step of the calculation which refers only to “real property,” shows that the General Assembly is capable of excluding the term “personal property” from the statutory language. However, the General Assembly specifically did not use the term “real property” in the second step of the calculation, but instead used the term “all classes of taxable property” which includes both real property and personal property. Thus, personal property is meant to be included in the second step of the compensating tax rate calculation.

In conclusion, the Attorney General opined that the recall provisions of KRS 68.245(6) are not triggered when a real property tax exceeds the previous year’s rate by more than four percent (4%), unless the rate also exceeds, by more than four percent, the compensating tax rate as defined in KRS 132.010(6). And in calculating the compensating tax rate, personal property must be included when applying a rate to “all classes of taxable property” as stated in KRS 132.010(6).

If you have questions about this topic or any other legal issue, please contact any member of the firm's State and Local Tax Team.

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