The KLC City Census: A Quick Dive into City Finances

Kentucky’s cities create economic prosperity daily for the Commonwealth through the essential services and opportunities they afford its citizens. Despite constrained budgets due to limitations on revenue and resources, Kentucky cities remain the backbone of the state’s economy by efficiently delivering critical services to meet the everyday demands of their citizens.  

The KLC City Census results show that Kentucky cities are good stewards of the public’s money and reflect local governments’ commitment to effectively and efficiently utilizing limited municipal revenues to continue to grow their communities. This week’s article outlines the various ways in which cities are able to finance the vital services they provide.  

Kentucky cities are constitutionally restricted in the taxes they may levy to raise municipal revenues. Kentucky cities predominantly generate revenue through the implementation of property taxes, occupational business licensure fees, insurance premium taxes, motel transient room taxes, and restaurant taxes. The table below outlines the various taxes Kentucky cities levy by population size.  

Note: Under Kentucky law (KRS 92.280), no city is exempt from levying property taxes on real property, personal tangible property, or motor/watercraft. The average city rate in FY 2024 was 21.54 cents per $100 of assessed value. Louisville levies a different property tax and insurance premium tax based upon location within its urban service district or within the merged city/county. 

The table demonstrates that Kentucky cities are utilizing the constitutionally prescribed taxes at their disposal. In FY 2023, Kentucky cities collected approximately $2.5 billion in municipal tax revenue. However, more than a tenth of that revenue (about $580 million) was generated by Louisville and Lexington. Excluding those, Kentucky’s remaining 406 cities—80% of which have a population under 5,000—generated approximately $52.8 million. This drastic disparity demonstrates the financial constraints on smaller municipalities due to their revenue-generating limitations.  

The tax that cities are most reliant on to fund critical services is the occupational business licensure fee, with some cities levying more than one of these fees. In FY 2023, these fees generated approximately $1.5 billion for cities. One hundred seventy cities levy the fee on gross earnings, 89 on net profits, and 39 on gross receipts. In FY 2023, the median rate levied on gross earnings was 1.47%, 1.5% on net profits, and 0.75% on gross receipts (many municipalities have varying rates based on the goods taxed).  

Another crucial tax that cities implement is insurance premiums. Kentucky cities may levy the tax on insurance premiums under KRS 91A.080 for specific insurance policies that are issued within a city, such as casualty, automobile, inland marine, fire, health, and life. The tax is collected by the insurer and remitted to the city. Based on the results of the KLC City Census survey, all 365 Kentucky cities levy a tax on fire and casualty insurance policies, with all but one also levying a tax on auto insurance policies. 297 Kentucky cities levied a tax on life insurance policies, and 222 cities levied one on health insurance policies issued. In FY 2023, the insurance premium tax collected approximately $352 million in tax revenue for Kentucky cities.  

Other, smaller fees several Kentucky cities rely on include alcohol regulatory fees, bank deposit fees, and building/electrical permits. According to the KLC City Census survey, 128 cities institute an alcohol regulatory license fee. This fee generated approximately $26.6 million in revenue for Kentucky cities in FY 2023.  

Kentucky’s local governments provide essential services that its citizens rely on every day. Despite their municipal revenue limitations, local government officials can provide a communal environment in which their citizens feel safe, secure, and proud. From the parks where our children form lasting friendships to the local celebrations that unite our communities, Kentucky cities utilize their limited resources effectively and responsibly. For Kentucky to continue to grow economically, it is imperative that Kentucky’s cities be granted the necessary tools to continue to provide their services at the highest level. 

The next article will examine public safety within our municipalities. Following the conclusion of the KLC City Census series, a detailed report of the full survey results and an analysis of municipal research will become available.