Payroll tax arguments hinge on population

A special judge is expected to rule within six weeks whether the city of Corbin gets to keep money from a one percent occupational tax on workers and businesses in the city, or if it should stay with the Knox County Fiscal Court.

Both sides presented their arguments last Thursday in Laurel County before special Judge Roderick Messer. The city of Corbin, which passed a one percent occupational license tax in Aug. 2005, is claiming its residents should be able to take a credit against a similar tax, approved in 1999, for all of Knox County. If their arguments hold, the Knox County Fiscal Court would not receive any money from occupational taxes paid from inside the city of Corbin.

“Corbin residents would be at risk of being subjected to two taxes and not being issued a credit,” argued Patrick Hughes, an attorney representing the city of Corbin in the case. “Corbin has an interest in seeing its citizens taxed fairly.”

Central to arguments in the case was a similar dispute between the city of Barbourville and Knox County, which went all the way to the Kentucky Supreme Court, and was finally settled in 2003. Barbourville passed an occupational tax in Oct. 1999, a couple weeks before the Knox County Fiscal Court took the same measure. At the time, state law provided that counties with a population less that 30,000 did not have to allow cities with a similar tax to claim credits. But the law did not give any mechanism by which population was to be determined.

Through expert testimony, it was ruled Knox County’s population exceeded 30,000 at the time the tax was passed. After lengthy negotiation, the two sides reached an agreement that remains in effect to this day. Barbourville gets 32 percent of all taxes collected in Knox County up to $1.8 million, and 25 percent thereafter until 2012, when it reverts to straight 25 percent. Knox County Assistant Judge Executive Jim Tye, who was City Manager of Barbourville during the dispute, said the county and city agreed on 25 percent, but that an extra seven percent was added to make up for back taxes that the county collected and spent, but could not pay to Barbourville all at once.

In the wake of the dispute, state legislators passed a moratorium on any occupational license tax levies until the situation was settled. As a fix, the General Assembly changed the law to say that population is determined by the most recent U.S. Census.

Donald McSwain, who represented both Knox County and the city of Barbourville at last week’s hearing, argued that residents in the city of Corbin were not entitled to a credit because the city did not participate in the original litigation between Barbourville and Knox County.

“It was given every opportunity to do so and it declined to do so,” McSwain said. “We were making efforts to get Corbin to join the suit but they wouldn’t for whatever reason.”

McSwain told Messer that changes in law regarding occupational taxes were “remedial” measures intended to fix ambiguity regarding how population is determined, not “retroactive” legislation that would allow Corbin to gut a significant portion of what Knox County receives in tax revenue from inside the city limits. Neither Tye nor Knox County Judge-Executive J.M. Hall said they know how much occupational tax revenue is collected from the city of Corbin.

“We didn’t have no reason to determine it from our standpoint,” Hall said after the hearing.

The city of Corbin asked, on prior occasions, for a breakdown of how much tax is collected from the city. Knox officials said the information doesn’t exist. Corbin leaders sought an opinion from Kentucky’s Attorney General on the issue in an attempt to force the county to produce the breakdown, but was rebuffed.

Hughes argued that the current tax-sharing situation created “two worlds” in Knox County where laws applied differently depending on where you lived. He told Messer if he adopted arguments presented by McSwain, then Corbin residents would be “double taxed,” forced to pay one percent to Knox County and one percent to the city of Corbin, a move he said would be negative for economic development prospects.

“If taxes and economic development were not related, our Kentucky Revised Statutes would not be chock full of credits designed to bring businesses to certain areas.”

Hughes argued that the court ruling in the dispute between Barbourville and Knox County proved that the county’s population was over 30,000 at the time, and remains so today, which should entitle Corbin residents to the credit.
McSwain argued, basically, that the judicial decision that led to the deal between Barbourville and Knox County could not be circumvented by interpretations of current laws. He added a ruling in Corbin’s favor could endanger similar county-city tax situations all over the state, leading to more litigation.

“Now, they want to be given a free ride,” McSwain said of Corbin. “You didn’t intervene at a time when you could have fixed the law in your favor.”

Messer asked if Corbin would be stuck with the results of the decision “30 years from now.”

“They are in a position where they can’t do anything but live by the rule.”

At the opening of his arguments, McSwain spent some time on the issue of standing. He said the “dispute” between Corbin and Knox County is not yet ripe for judicial review because the city has chosen not to collect the tax from its Knox County citizens.

Hughes countered that the city sought judicial intervention first because it knew a controversy over the matter was imminent and unavoidable. He added they would only have to levy the tax against one taxpayer for harm to be proven.

Joe “Butch” White, a local tax preparer who lives and works in Knox County, is also a plaintiff in the case. He said after the hearing that he is angry that some of the tax money he pays to Knox County is being given to the city of Barbourville – one of the main reasons he decided to join the lawsuit.

“I receive no services from the city of Barbourville. No police, water, garbage, nothing!” he said. “Therefore, I don’t care who says they deserve it, they are wrong. It matters to me and I’m sure it matters to thousands of workers in the city limits of Knox County where their tax money goes … the city of Barbourville furnishes east Corbin with absolutely zero services. It’s like sending Kentucky tax money to Hawaii. It doesn’t fit.”