Kentucky’s Primary Municipal Taxes and Revenues

Kentucky’s cities fund their crucial governmental services through the implementation of municipal taxes and other fees. In FY 2023, Kentucky cities collected a little over $5.9 billion in revenue. Municipal tax revenue makes up nearly 41% (approximately $2.5 billion) of the total municipal revenue collected.  Although cities are statutorily limited in how they can raise revenue, they are tasked with providing many of the state’s most critical services, including police and fire protection, EMS services, utilities, and street maintenance. 

Presently, Kentucky law permits cities to implement taxes on property, occupational business licenses, insurance premiums, and tourism (transient rooms and restaurants). In FY 2023, municipal tax revenue collected consisted of 60.6% occupational business license fees on employee payrolls, business gross receipts, and business net profits 23.3% property taxes on real property, tangible property, and motor vehicle/watercraft, and 14.3% insurance premium taxes. Tourism taxes (the hotel transient room tax and restaurant tax) are statutorily permitted to be levied by certain Kentucky cities. Those taxes made up 1.7% of total municipal tax revenues in FY 2023. It is essential to note that both Louisville and Lexington have a hotel transient room tax; however, the tax is not collected by the city. 

Kentucky cities are permitted to levy occupational business license fees under Section 181 of the Kentucky Constitution. KRS 92.281 permits cities to levy a tax on wages, net profits, and certain business activities. Currently, 170 Kentucky cities levy a tax on gross earnings, 89 cities on net profits, and 39 cities on gross receipts.  The average tax levied on gross earnings, the most common form of occupational business license fees, is approximately 1.47%.  

The Kentucky constitution, under Section 157, outlines the maximum property rates cities may levy based on their population. All cities must adopt a property tax by ordinance under KRS 92.280. Kentucky cities are also limited in the maximum rate they may set their property tax under KRS 132.027. This law outlines the process for the adoption of a compensating rate (the rate that will produce equivalent revenue as the prior fiscal year) and the 4% rate threshold. Any rate that would generate more than a 4% increase in revenue from the prior year is subject to recall by the voters. KRS 132.810 outlines the homestead exemption, in which the taxable value of the primary residence for seniors and totally disabled homeowners is reduced by an amount that may be adjusted for inflation every two years if the rate has changed by as much as 1%. 

The final primary source of municipal tax revenues is through the implementation of an insurance premium tax. This tax is authorized under KRS 91A.080 in which cities may levy a tax on insurance premiums for specific insurance policies (casualty, automobile, inland marine, fire, health, and life) issued within a city. The limits for a municipality to levy an insurance premium tax on specific premiums can be found under KRS 91A.080(10). The tax is collected by the insurer and is remitted to the city. Kentucky law differs from other states in that the tax is applied where the risk exposure is located. The current tax rate schedule on insurance premium taxes by city can be found here.  

Kentucky’s current statutory framework restricts how cities can generate revenue, even as the cost of providing vital public services continues to rise. 

For example, in FY 2023, total municipal expenditures for cities were greater than total municipal revenues collected by approximately $230 million. Further, this limitation greatly impacts Kentucky’s smaller cities, which make up most of the cities in Kentucky. Based on 2020 population figures, over 80% of Kentucky’s cities have a population below 5,000 residents.  

For Kentucky’s economy to continue growing, cities must be equipped with the tools needed to provide essential services like public parks, city streets, and clean drinking water efficiently and effectively. That requires not only modernized revenue authority, but also protection from preemption that undermines local decision-making. Kentucky cities need taxing authority that offers both stability and flexibility. A system that respects home rule and avoids unnecessary preemption will ensure cities can continue delivering the services that keep communities strong, safe, and positioned for long-term success.