Tax Rate Calculations

Recently, I’ve been working on tax rate calculations for cities in Northern Kentucky. This is a yearly service the ADD provides for free. Kentucky cities and special districts utilize these tax rate calculations to ensure they receive at least the same amount of revenue each year from real property and tangible property taxes. This helps provide a stable amount of cash flow to the city or special district each year. One danger in this calculation is dropping values, or if a property falls off the tax rolls for various reasons, this can spike the rate that is calculated in a given area.

The city does not necessarily have to take the tax rate that these calculations provide. They are free to choose their rate, with some limitations provided by the Kentucky Revised Statutes. Therefore the calculation sets the rates used to benchmark some legal requirements in the tax rate adoption process.

Beyond the compensating rate, the rate that would provide similar revenue, I also calculate a “substitute rate” and a “Rate +4”, which provides for 4% more revenue. There are some procedures engendered by taking a rate above the compensating rate, including public hearings and, if the city goes beyond the Rate+4, the opportunity for a recall vote on the rate. (Note: the recall can only be for the portion above 104%)

Being an Ohio native, this process has been a bit foreign to me. Luckily I’ve been able to pickup and understand the process and the purpose of the calculations fairly quickly. Though they are not perfect, I think there is some merit to what Kentucky is doing via this process. Ensuring cities remain viable would do much and more in Ohio where the 2008 economic crisis doomed many cities to debt or bankruptcy. I should be clear, however, this process does pose a possible strain on the citizens of Kentucky cities in that rates fluctuate to accommodate revenue year to year. Because of this the loss of businesses or, as I mentioned above, the falling off of property from the tax roll can adversely affect local tax rates.

I do not feel like I know enough yet to make a firm conclusion about whether the tax rate calculation process is more beneficial than harmful, but it is certainly a unique idea.