Could Kentucky's proposed 1992 job development assessment on employees be an illegal tax or special legislation?

Plain-English summary

Kentucky's 1992 House Bill 89 would have let certain manufacturers require employees whose jobs arose from an economic development project to pay a job development assessment, capped at six percent of gross wages. The assessment would help retire bonds used to finance the project, and employees would receive specified income and local occupational tax credits. Asked whether this arrangement imposed an unlawful tax or created prohibited local or special legislation, the AG answered no. It construed the payment as an obligation between the company and its employees because the company owed the bond debt service and the payment would not fund government. It also found the bill's unemployment and company qualification standards a reasonable basis for limiting participation.

Currency note

This opinion was issued in 1992. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Historical summary

Employees whose jobs arose from a qualifying project

The bill described a possible assessment of up to six percent of gross wages, deducted by an approved company that chose to impose it as a condition of employment. It also described credits against Kentucky income tax and the local occupational license fee. The AG's conclusion concerned the proposed assessment in this bill; it did not analyze a general power to deduct wages for other projects.

Manufacturers and economic development officials

The AG treated the state as a bond financing conduit and the company as responsible for debt service. On that construction, the assessment reimbursed a company obligation and was not a tax payable to government. The bill used county unemployment history and company qualification standards to determine which projects could participate. The AG found those distinctions related to the subject of the bill and therefore found no violation of Kentucky Constitution Sections 59 and 60.

Legislators considering the bill

The opinion confined its analysis to section 28's assessment provision, even though House Bill 89 contained seventy-eight sections. Its constitutional conclusions were therefore about the identified assessment and eligibility structure, rather than every provision of the bill.

Common questions

Did the AG call the employee job development assessment a tax?

No. It construed the fee as a payment between the company and employee, because the company owed the bond debt service and the fee was neither payable to government nor used to defray government costs.

Why did the AG accept a program limited to certain Kentucky counties?

The bill required a qualified county's unemployment rate to exceed the statewide rate in four of the five most recent consecutive years. The AG viewed that criterion, together with standards for eligible companies, as a reasonable classification for the economic development program.

Did the opinion decide whether every part of House Bill 89 was constitutional?

No. It expressly confined its analysis to section 28, the job development assessment provision presented in the request.

Background and statutory framework

House Bill 89 proposed changes to KRS chapters 154 and 155. Its section 28 described an employee assessment, a two-thirds credit against Kentucky income tax withheld under KRS 141.350, and a one-third credit against a local occupational license fee. The AG applied Kentucky's constitutional prohibition on local and special legislation and distinguished a private company payment from a tax by asking whether it was payable to government or defrayed government costs.

Citations and references

• KRS chapters 154 and 155; KRS 141.350: statutory provisions identified in the bill discussion.
• Dalton v. State Property and Buildings Commission, Ky., 304 S.W.2d 342 (1957), and Hayes v. State Property and Buildings Commission, Ky., 731 S.W.2d 797 (1987): constitutional review principles cited by the AG.
• Board of Education of Jefferson County v. Board of Education of Louisville, Ky., 472 S.W.2d 496 (1971): the AG's source for local and special legislation classifications.

Source

• Landing page: https://www.ag.ky.gov/Resources/Opinions/Opinions/OAG92-055.htm

Original opinion text

OAG 92-55

April 6, 1992

Vic Hellard, Jr.

Director

Legislative Research Commission

State Capitol

Frankfort, Kentucky 40601

Dear Mr. Hellard:

You have submitted the following questions pertaining to House Bill 89:

Does this legislation violate Section 59 and 60 of the Constitution of Kentucky since it applies only in limited areas of the state and since it applies only to certain programs in which state funding is provided and not to all programs?

Does this legislation violate numerous sections of the Constitution of Kentucky relating to taxation as an illegal form of tax not authorized by the Constitution?

If the tax can be considered legal under taxation sections of the Constitution of Kentucky, does it not violate Sections 59 and 60 as special legislation for the reasons cited above.

House Bill 89, entitled “An act relating to economic development,” contains seventy-eight sections and makes substantial changes to KRS chapters 154 and 155. You state that the bill “proposes that employees who work for companies which locate in selected areas where state moneys are expended pay part of their salaries to cover the cost of providing the state money.” This provision appears in section 28 of the bill. We will confine our analysis to that section. It enacts the following language:

(1) The approved company may require that each employee, as a condition of employment, agrees to pay a job development assessment fee, not to exceed six percent (6%) of the gross wages of each employee whose job was created as a result of the economic development project, for the purpose of retiring the bonds which fund the economic development project.

(2) Each employee so assessed shall be entitled to credits against Kentucky income and local occupational taxes as follows:

(a) Two-thirds (2/3) of the job development assessment fee withheld from wages during the calendar year shall be permitted as a credit of Kentucky income tax withheld as provided by KRS 141.350;

(b) One-third (1/3) of the job development assessment fee withheld from wages during the calendar year shall be permitted as a credit against any local occupational license fee incurred by the employee for the taxable year in the jurisdiction in which the economic development project is located.

(3) If an approved company shall elect to impose the assessment as a condition of employment, it shall deduct the assessment from each paycheck of each employee.

Interpretation of this passage requires an understanding of the term “approved company,” which is defined with reference to other terms that also require definition. An approved company is, according to section 22 of the bill, “any eligible company seeking to locate an economic development project in a qualified county, which eligible company is approved by the authority pursuant to Sections 22 to 28 of this Act.” The same section defines eligible company as “any corporation, partnership, sole proprietorship, business trust, or other entity engaged in manufacturing which meets the standards promulgated by the authority pursuant to Sections 22 to 28 of this Act.” A qualified county is “any county certified as such by the authority pursuant to Sections 22 to 28 of this Act.” The Authority referred to in the bill is “the Kentucky Economic Development Finance Authority as created in Section 17 of this Act.”

Essentially the bill allows eligible companies to finance economic development projects by using the state's power to issue bonds as a conduit for financing. The state issues the bonds and allows the company to use the amount raised to pay for its project. The company then reimburses the state for the cost of the debt service on the bonds.

I. Local and Special Legislation

In engaging in constitutional analysis we are aware of the presumption of constitutional validity of legislative enactments. A liberal construction is given to constitutional limitations, with reasonable doubts being resolved in favor of validity of questioned enactments. Dalton v. State Property and Buildings Commission, Ky., 304 S.W.2d 342 (1957). The wisdom of legislative action and the soundness of its underlying economic theories do not affect an analysis of whether an enactment is constitutional. Hayes v. State Property and Buildings Commission, Ky., 731 S.W.2d 797 (1987).

Sections 59 and 60 of the state constitution prohibit the legislature from enacting local or special legislation. Local legislation is “confined to territorial limits other than that of the whole state or . . . applicable to some political subdivision and not to others.” Board of Education of Jefferson County v. Board of Education of Louisville, Ky., 472 S.W.2d 496 (1971). Local legislation is valid if it is based on a classification having natural, real, or substantial distinctions inherent in the subject matter. Id. Special legislation “arbitrarily or beyond reasonable justification discriminates against some persons or objects and favors others.” Id.

House Bill 89 contains objective standards for the Authority to use in certifying qualified counties and eligible companies. A qualified county must “have had a countywide rate of unemployment exceeding the statewide unemployment rate of the Commonwealth in four (4) of the most recent five (5) consecutive years.” HB 89, �25. An eligible company must meet standards promulgated by the Authority in administrative regulations; the standards are to include the creditworthiness of companies, the number of jobs that will be created by a proposed economic development project, and the likelihood of success of the project.

We believe that these objective standards provide a reasonable classification that supports the application of the Act to the particular counties and companies that are certified. The distinction that the Act draws are inherent in the subject matter. Therefore in response to your first and third questions we do not find a violation of sections 59 and 60 of the state constitution.

II. Other constitutional provisions regarding taxation

You ask whether HB 89 enacts an illegal form of tax not authorized by the constitution. The questioned provision, in section 28 of the bill, says:

(1) The approved company may require that each employee, as a condition of employment, agrees to pay a job development assessment fee, not to exceed six percent (6%) of the gross wages of each employee whose job was created as a result of the economic development project, for the purpose of retiring the bonds which fund the economic development project.

Although the bonds are issued by the state, the eligible company is responsible for the annual debt service on the bonds; therefore we construe the phrase “for the purpose of retiring the bonds which fund the economic development project” as referring to the obligation of the company rather than the obligation of the state. Under this construction, the job development assessment fee constitutes a transaction solely between the company and its employees. The fee is not a tax since it is not payable to the government and it does not defray the cost of government. Long Run Baptist Association. v. Louisville and Jefferson County Metropolitan Sewer District, Ky.App., 775 S.W.2d 520 (1989).

Since the job development assessment fee is not a tax, it does not represent an illegal tax in violation of any constitutional provision.

Sincerely,

Chris Gorman

Attorney General

Ross T. Carter

Assistant Attorney General