Topic: What has been the city of Berea's real property tax rate over the years?

q&a.2 Copywrite © Steven Connelly, 2008

Question 2: IF GAINING THE POWER TO TAX REAL PROPERTY TO FINANCE LOCAL IPROVEMENTS WAS ONE REASON THAT BEREA WAS INCORPORATED IN 1890, WHAT TAX RATE HAS THE CITY IMPOSED ON REAL PROPERTY OVER THE YEARS? I UNDERSTAND THAT BEREA RAISED ITS REAL PROPETY TAX RATE FROM 3 CENTS PER $100 ASSESSMENT TO 10 CENTS IN 2007. HOW DOES A RATE OF 10 CENTS COMPARE WITH PAST RATES?

Answer:
1. Berea first levied a tax on real property in 1893 at a rate of 20 cents per $100 assessment. The tax rate ranged between 10 cents and 25 cents into the early 1900s; it varied between 40 and 65 cents in the years between 1909 and 1919. In 1920 the rate was raised to 75 cents where it remained, with only a few exceptions, through 1965; it was lowered dramatically in 1966 to 5 cents where it hovered through 1990 and then began a gradual decline to 3 cents in 2004, 2005, and 2006. The city council increased the rate to10 cents in 2007.

An examination of these historical tax rates reveals several significant facts. First, the real property tax rate in Berea was 75 cents through the Great Depression. Considering the economic stress of that time, the size of that rate is surprising. Second, the tax rate for the last forty years raised only enough revenue to pay a fraction of the cost of governmental operations. Therefore, it is not surprising that the city council considered eliminating the real property tax in 1996.

A study of these rates also raises the question why the rate was lowered from 75 cents in 1965 to 5 cents in 1966? There were several reasons. The first was the ruling by the Kentucky Court of Appeals on June 8, 1965 in Russman v. Luckett which did two things. The case itself required all real property assessments to be made at 100 per cent of their fair cash value. That ruling prompted Gov. Breathitt to call a special session of the Kentucky General Assembly which enacted a “roll back” law to limit tax rates in 1966 to a rate, when applied to the 100 percent assessments, would produce approximately the same amount of revenue as was produced prior to the Russman decision. This roll-back law was one reason that the Berea City Council lowered the tax rate in 1966. The second reason was the council’s belief that it needed to encourage passage of a special school building tax to finance the new community school. Two previous attempts to pass this bond issue had already been defeated in May 1960 and October 1961. The need to encourage voters to support building a new school was the other reason the rate was lowered.

The combination of the “roll-back” law and the need to encourage voters to accept the school building tax appeared to be the motivation for the tax rate reduction in 1966.

The answer also has an interesting background which begins with the impact of Section 170 of the Kentucky Constitution on Berea. This section provides that real property owned by an educational institution, not used or employed for gain, and the income of which is devoted solely to the cause of education, is exempt from taxation. Arguably, Section 170 exempted all real property owned by Berea College in Berea from taxation. This exemption was significant to Berea because the college was a large real property owner.

This ability to tax college real property was tested by the Commonwealth of Kentucky in the Madison county court when it filed suit to compel assessment of certain properties owned by Berea College. The case was decided in favor of the college and upheld on appeal in 1912 with the result that all real property owned by Berea College in Berea was exempted from tax.

A major reason why the city enacted an occupational license fee ordinance in 1964 was the fact that so much real property in Berea was not taxable. This ordinance, in effect, placed a 1 percent tax on income earned in the city. This newly created revenue source would ultimately grow to produce 70 percent of the city’s operating revenue. The key to the success of the “payroll tax” was employment, particularly manufacturing employment, which was already substantial in Berea by 1964.

When the Berea Rubber Company, later known as Parker Seal, located in Berea in 1951 , it brought 153 jobs on three shifts with a monthly payroll of $32,000. When Manning, Maxwell and Moore, later known as Dresser Industries, opened in 1962, it brought 160 more jobs. Both plants added employees over the years, and Berea continued to recruit and lure additional manufacturing plants. This growing job-base facilitated the gradual shift from reliance on real property taxes to the payroll tax for funding the cost of governmental operations. The city council noticed this job growth and, in 1964, enacted Ordinances 8-64 and 8-A-64 which created the occupational license fee, sometimes called the “payroll tax.”

At the same time Berea was attracting manufacturing plants, the local school system was struggling to upgrade its building. Plans were created first for an additional building at another site to house the elementary program. When this attempt failed, alternate plans were devised to renovate the existing building on Chestnut Street to provide adequate space for both the elementary and high school programs. On two prior occasions, the community had voted down a special building tax to fund these improvements. But, in 1962, with the suggestion of a merger with the Madison County school system being proposed as an alternative to renovation, local activists forged a plan to merge the Berea Independent school system with the elementary and secondary schools of Berea College. However, even if successful, such a merged system would still need improved school buildings.

Funding for construction of a new school would have to come through a special voted bond issue. In order to increase the chances that a third school bond vote would succeed, the city council agreed to reduce its existing real property tax rate of 75 cents per $100 assessment to 5 cents conditioned on the town approving the special building tax. In the end, it was the combination of this need to encourage voters to support the bond issue and the diminished reliance on the real property tax to fund city services, that motivated the city council to the drop its real property tax rate to 5 cents in 1966.

Berea kept its real property tax rate at 5 cents from 1966 to 1979. In that year, the Kentucky General Assembly adopted House Bill 44 at a special session. This new legislation imposed a limit on real property tax rates known as the “compensating tax rate” which, when applied to the current year’s assessment of property would only produce an amount of revenue approximately equal to that produced in the preceding year. House Bill 44 also restricted the ability of local government to levy a tax rate that exceeded the compensating tax rate without first advertising and holding a public hearing. After the hearing, that portion of the tax rate which would produce revenues of more than 4% than would have been produced by the compensating rate would be subject to a recall vote.

In 1980, the city council, aware of the impact of House Bill 44, received a report from City Administrator Gene Stichcomb concerning the level of the 1980 rate. He reported that total assessments for 1980 increased from $82 million to $95 million (estimated). Based on these figures the rate that would generate the same revenue that we had last year would be 4.33 cents per $100. A 4% increase rate would be 4.5 cents per $100 which would amount to $43,052. The 1979 rate at 5.0 cents per $100 would subject the city to petition and recall referendum. The maximum rate possible under the statutes would be 5.5 cents which would generate $52,619. Anything above 4.5 cents would subject the rate to a petition and recall referendum. He suggested that the rate chosen in 1980 would likely be the highest future rate unless the state statute was changed. IN the first meeting in August, the city council received a report from the finance committee that recommended setting the ad valorem tax rate at 5.5 cents per $100 assessment, the maximum amount allowable under House Bill 44. The city council decided that any revenue over the 4% limit would be reserved for street repairs and reconstruction. Pursuant to House Bill 44, a public hearing was held on the increased rate on August 28, after which the tax rate of 5.5 cents was adopted. As predicted, the real property tax rates continued to ratchet down each subsequent year to the extent that in 1996, the city council seriously considered eliminating the property tax altogether.



Real Property per $100 valuation Source
1893 20 cents 5-25-1893 Town Board minutes;
1894 10 cents 6-14-1894;
1895 15 cents 9-15-1895
1896
1897 15 cents 2-11-1897
1898 15 cents 12-9-1897
1899
1900
1901
1902 25 cents 7-21-02
1903 25 cents 10-17-03

1904
1905
1906
1907
1908
1909 50 cents 4-13-09 Berea Council minutes;
1910 50 cents 2-8-10;
1911 50 cents 1-10-11;
1912 65 cents 2-13-12;
1913 55 cents 3-11-13;
1914 65 cents 2-10-14;
1915 65 cents 2-9-15;
1916 65 cents 2-8-16;
1917 50 cents 2-13-17;
1918 50 cents 3-12-18;
1919 40 cents 2-11-19;
1920 75 cents 2-10-20;
1921 75 cents 1-11-21;
1922 75 cents 2-13-22;
1923 75 cents 2-12-23;
1924 75 cents 3-10-24;
1925 75 cents 1-12-25;
1926 75 cents 3-8-26;
1927 75 cents 3-14-27;
1928 75 cents 3-2-28;
1929 (7-5-29: reference to collection of 1929 in clerk’s report but no ordinance)
1930 75 cents 3-7-30;
1931 75 cents 3-6-31;
1932 75 cents 3-4-32;
1933 75 cents 3-3-33;
1934 75 cents 4-6-34;
1935 75 cents 4-6-35;
1936
1937 75 cents 3-5-37;
1938 75 cents 1-7-38;
1939
1940 75 cents 1-5-40;
1941
1942 75 cents 2-6-42;
1943 75 cents 1-1-43;
1944
1945 75 cents 1-3-45;
1946 75 cents 1-7-46;
1947
1948 75 cents 9-2-48;
1949 75 cents 10-5-49;
1950 75 cents 2-7-50;
1951 75 cents 4-3-51 p299;
1952 75 cents Ord. Book 1/116;
1953 75 cents Ord. Book 1/167;
1954 75 cents
1955 75 cents
1956 75 cents Ord. Book 1/243;
1957 75 cents Ord. Book 1/260;
1958 75 cents Ord. Book 1/299, #15-58;
1959 65 cents Ord. Book 1/327;
1960 65 cents Ord. Book 1/372, #18-60;
1961 65 cents Ord. Book 1/388, #11-61;
1962 75 cents Ord. Book 1/400;
1963 75 cents Ord. Book 1/419;
1964 75 cents Ord. Book 1/462;
(Ordinance Book 1/455 passed Occupational License Fee at 1%)
1965 75 cents Ord. Book 2/17;
1966 5 cents Ord. Book 2/49;
1967 5 cents Ord. Book 2/91;
1968 5 cents Min. Book G, p512-13;
1969 5 cents Min. Bk. G, p563;
(first time no poll tax; see p564, Ord. #12-69)
1970 5 cents Min. Bk. 9-1-70 p39 Ord. #4-70;
1971 5 cents Min. Bk. 7-6-71 p72;
1972 5 cents Min. Bk. 6-6-72 p129;
1973 5 cents Min. Bk. 7-17-73
1974 5 cents Min. Bk. 7-2-74 p30;
1975 5 cents Mn. Bk. 6-17-75 p102;
1976 5 cents Ord. #12-76;
1977 5 cents Min. Bk. 8-2-77, Ord. 13-77;
1978 5 cents Ord. #7-78;
1979 5 cents Min. Bk. 9-4-79 and 9-18-79, Ord. 19-79;
1980 5.5 cents Min. Bk. 7-15-80;
1981 5.344 cents Min. Bk. 8-18-81;
1982 5.12 cents Min. Bk. 8-17-82 Ord. #19-82; adopted Min. Bk. 9-7-82;
1983 5.12 cents Min. Bk. 8-16-83 Ord. #10-83;
1984 5.12 cents Min. Bk. 8-21-84 Ord. #19-84, adopted Min. Bk. 9-4-84;
1985 5.12 cents Min. Bk. 8-6-85 Ord. #7-85, adopted 8-20-85;
1986 5.12 cents Min. Bk. 8-5-86 Ord. #10-86 adopted 8-19-86;
1987 5.17 cents Ord. #4-87
1988 5.17 cents Min. Bk. 9-6-88 Ord. #22-88;
1989 5.05 cents Min. Bk. 10-3-89 Ord. #27-89;
1990 5.05 cents Min. Bk. 9-18-90 Ord. #20-90;
1991 4.32 cents Ord. #22-91;
1992 4.32 cents Ord. #20-92;
1993 4.26 cents Ord. 1-94;
1994 3.7 cents Ord. #4-95;
1995 3.33 cents Min. Bk. 11-7-95; Ord. #23-95 11-21-95;
1996 3.30 cents Min. Bk. 11-19-96;
1997 3.30 cents Ord. #25-9;
1998 3.52 cents Ord. #29-98;
1999 3.12 cents Ord. #18-99;
2000 3.27 cents Ord. #14-00;
2001 3.24 cents Ord. #19-01;
2002 3.12 cents Ord. #20-02
2003 3.20 cents Ord. #21-03;
2004 3.00 cents Ord. #24-04;
2005 3.00 cents Ord. #28-05;
2006 3.00 cents Ord. #20-06;
2007 10.00 cents Ord. #06-07;
2008

Motion made by Bill Hamilton, seconded by Howard Baker, Min. Bk. 11-19-96; see statement by city attorney, Min. Bk. 12-3-96, that in his opinion “the city does not have the option to completely abolish the ad valorem property tax, and that a tax must be assessed and levied annually; the city further may not assess and levy ad valorem property tax but exempt all of the property so assessed; and if the city reduces the ad valorem property tax rate in a given year, it may not thereafter in a succeeding year increase the rate to generate more than 4% of the previous year’s compensating tax rate revenue without subjecting the entire increase beyond the 4% to a recall to a recall.”

Russman v. Luckett, 391 S.W.2d 694 (1965);

See the Berea Citizen which reported the following on December 2, 1965:

“All eight members of the incoming Berea City Council have signed a pledge stating that they will reduce the city’s property tax from 75 cents to 5 cents per $100 valuation after they take office in January, provided the school bond issue is approved December 8.

The document, addressed ‘to whom it may concern,’ is dated November 24. The wording is as follows: ‘We, the undersigned members of the recently-elected City Council of Berea, Kentucky, do hereby resolve that---if the bond issue passes in the December 8th election---we will enact an ordinance soon after we take office in January, 1966, reducing the Berea City property tax from 75 cents per $100 valuation to 5 cents per $100 valuation.’

It is signed by councilmen-elect Maurice Hammond, Richard F. Stoy, Earl E. Hamilton, Dewey C. Rose, H.L. Hull, E.E. Gabbard, T.P. Baker and Frank Farmer, and by the Mayor C.C. Hensley.

The council has the annual responsibility for setting the city property tax rates in accordance with state law. The forthcoming reduction in the tax rate is based on the Court of Appeals ruling that the 1966 property tax assessment must be at 100 per cent of the market value.”

See Commonwealth by Ferriell, Revenue Agent v. Berea College, 147 SW 929, (Ky. 1912):

The Commonwealth filed suit in the Madison County Court to cause certain property owned by Berea College to be assessed for taxes. The County Court had assessed the properties, but the Madison Circuit Court, upon appeal, dismissed the case. The Commonwealth appealed to the Kentucky Court of Appeals where the dismissal was affirmed., concluding that the College was an educational institution within the meaning of section 170 of the Kentucky Constitution which provides “there shall be exempt from taxation institutions of education not used or employed for gain by any person or corporation and the income of which is devoted solely to the cause of education.”

Five properties were sought to be assessed in the case: a laundry, a waterworks, a printing plant, a store, and a small hotel. The Court ruled that the laundry was maintained as an educational adjunct and of value to female students by affording them a means of earning money and learning cleanliness and neatness. Significantly, the laundry was maintained at a serious deficit to the college.

The waterworks system had been erected with $40,000 donated by Dr. Pearson, allowing the college to provide water mains and hydrants to its campus and some community members at a rate similar to Winchester. The president testified that the water supply was necessary and all revenue derived was used to support the college operation.

The printing department was a part of the industrial education program and performed general printing and bookbinding. It also printed a newspaper, but that enterprise was a separate corporation and not a part of the college.

The college also maintained a small co-operative store which distributed towels, pillows, chairs and other items needed in the dormitories, boarding halls and hotel. It also sold books and toilet articles to students which were sold at a profit margin intended to cover expenses. In the five years before the suit, the store lost $60.

The college also owned a hotel known as Boone Tavern, built largely to house guests of the college and a boarding place for teachers, students and their families. The clerks, chambermaids, and waiters were students, and it made no annual profit.

From these facts, the Court concluded that the specified properties were maintained and operated by the college for the purpose of industrial education and training, or to provide students a supplemental income, or to supply, as in the case of the waterworks, a necessary hygienic adjunct. Though it is conceded that these properties are operated for gain, the gain, if any, which results was not in the commercial sense, but rather the meager profit, if any, which was turned into and becomes a part of the general income of the institution and was used to support its educational mission.

It was clear to the Court that the properties described were so intimately connected to the life of the college that it has not gone out into an active commercial life. In fact, as disclosed from the evidence, its existence, from year to year, is financially precarious. The Court ruled that the Kentucky Constitution frees an institution from paying taxes on its assets which are used in or devoted to the cause of education, an exemption which properly applied to Berea College.

See Ordinance 8-64 and 8-A-64; Min. Bk. 1/455.

Berea Citizen, 8-8-51.

Berea Citizen, 4-10-52.

Berea Citizen, 10-4-62.

KRS 132.010(6)

Min. Bk. 7-15-80 TAX RATE: Total assessments for 1980 increased from $82 million to $95 million (estimated). Based on these figures the rate that would generate the same revenue that we had last year would be 4.33 cents per $100. A 4% increase rate would be 4.5 cents per $100 which would amount to $43,052. The 1979 rate at 5.0 cents per $100 would subject the city to petition and recall referendum. The maximum rate possible under the statutes would be 5.5 cents which would generate $52,619. Anything above 4.5 cents would subject the rate to a petition and recall referendum.

Min. Bk. 8-5-80 Ord. 14-80. Dr. Kerby read the first reading of the Ordinance 14-80 concerning the ad valorem taxes.
The Finance Committee recommended that the ad valorem tax rate be set at the maximum amount allowable under the provisions of House Bill 44 at 5.5 cents per $100 assessment. The city would participate in street repair and or reconstruction on a 50/50 basis utilizing available funds for street work in 1981. Any anticipated increase over and above the 4% limit would be used for street repairs and reconstruction. The Finance Committee also recommended that the interest rate be set at 8%.
Burgio moved, McIntyre second to insert the figures 5.5 cents per $100 assessment for ad valorem taxes into the ordinance and the rate of 8% for interest. Carried.

Min. B. 8-28-80 Special Session. The purpose of the meeting was to hold a pubic hearing to discuss the proposed 1980 property tax rate. Connelly moved, Farmer second to adopt Ordinance #14-80 setting the property tax rate for 1980 at 5.5 cents per $100 assessment. All yes.

Min. Bk. 11-19-96: Council discussed the possibility of placing a moratorium on real property taxes; Min. Bk. 12-3-96: City Attorney Gilbert expressed his opinion that the city could not abolish and fail to assess ad valorem real property taxes but could exempt all classes of property from the tax., but, if done, House Bill 44 could require a referendum to replace it. Ord.18-96 set rate at 3.30 cents. Adopted 2-17-96.

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