Local governments in Kentucky face a unique fiscal challenge. Kentucky cities are constitutionally limited in the types of taxes they can levy to fund the public services their communities depend on. Yet despite those constraints, Kentucky cities have found ways to deliver high-quality services efficiently and reliably, thanks in large part to the occupational business license fee.
The ability to impose an occupational license fee stems from Section 181 of the Kentucky Constitution, which allows the General Assembly to delegate taxing power to local governments. Specifically, Section 181 provides that cities may collect license fees “on franchises, trades, occupations and professions.”
This authority is implemented through KRS 92.281, which gives cities the ability to levy an occupational license fee on gross earnings, net profits, and certain gross receipts.
To ensure consistency across jurisdictions, the General Assembly worked with KLC and the Kentucky Occupational License Association (KOLA) to create a uniform system for administering these fees under KRS 67.750 to 67.795. These statutes define key terms and processes, including how businesses file returns, the forms that are required to be submitted, and what income is subject to taxation.
Because both cities and counties may levy occupational license taxes, there are circumstances where a business or individual could be subject to both a city and county tax on the same income. To maintain fairness and prevent double taxation, KRS 68.197 provides an essential taxpayer protection: a credit against the county tax for any amount paid to a city, when the city is located within a county with a population over 30,000.
The occupational license fee is the financial backbone of Kentucky’s cities.
In Fiscal Year 2023, approximately 61% of total municipal revenue statewide came from occupational license taxes. It is by far the largest single source of revenue for cities, helping fund essential services including police and fire protection, EMS services, streets, sidewalks, road maintenance, and water and sewer infrastructure.
Currently, 170 Kentucky cities levy a tax on gross earnings, 89 cities 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%. A comprehensive list of Kentucky’s city occupational tax rates can be found here.
Despite constitutional and statutory limitations, Kentucky cities have built a model of fiscal responsibility and service delivery grounded in the occupational business license fee. It’s not just a tax; it’s a direct lifeline for cities both big and small. A one-size-fits-all approach would strip cities of the flexibility they need to respond to local challenges with local solutions. Preserving local control over this revenue tool is critical to ensuring that Kentucky’s cities can continue to thrive, grow, and serve those who work and live in our communities.