This story originally appeared in the Sept. 1 edition of the weekly LINK Reader. to see these stories first, subscribe here.
Erlanger City Council member Tyson Hermes stood at a December 2022 Kenton County Fiscal Court meeting.
Addressing Judge/Executive Kris Knochelmann, county commissioners and staff sitting behind desks surrounding the platform where he stood, Hermes, who is also a businessman, thanked the group for his opportunity to speak.
“The reason I wanted to address the court was just to express my distaste for the process and the timing of the tax rate increase that’s recently been announced,” he said at the Dec. 13 meeting.
That increase had received a second reading at a meeting earlier that year, on Election Day.
The court cast a vote to approve an increase on both employee payroll and business net profits throughout Kenton County on that Nov. 8 evening, but it wasn’t until Hermes’ comments more than a month later that rumblings of a backlash against the increases themselves came into play – along with the manner in which the county went about passing them.
“First, the vote taking place on Election Day, especially when in Erlanger we were wasting two or three hours in lines to vote,” Hermes said at the December meeting about long wait times throughout the county during the general election. “A lot of people wouldn’t have had time to be paying attention or to be showing up to voice their displeasure with that.”
Hermes questioned whether the county had acted opportunistically in passing the increases so close to an election, such that the voters might forget when it came time for re-election. He also questioned whether the move would, in fact, uphold the fiscal court’s responsibilities to effectively manage the county’s financial health.
“Is the fiscal health in jeopardy in the county that we had to look at such substantial tax rate increases?” Hermes asked rhetorically.
Rewind to November.
“This will set up Kenton County for financial stability for decades,” Knochelmann, who is in charge of setting up the county’s financial goals, said to the commissioners on Nov. 8.
“This group will continue to work,” Knochelmann said, before correcting himself. “Not work to … will commit to reducing tax on the rooftops” of county residents.
Knochelmann’s statements followed a presentation from Kenton County Treasurer Roy Cox, who laid out the county’s reasoning for amending its tax ordinance. He displayed charts comparing Kenton County’s revenue streams to those of the adjacent counties, pointing out that Kenton County was exceptionally reliant upon property taxes compared to payroll taxes.
The proposed amendment ordinance would change how employee wages and business profits were taxed from the previous year, not only in terms of rates but also in terms of the amount of wages and profits that could be taxed: The taxable cap would increase from $25,000 for the first tax tier to 50% of the federal Social Security cap, or $80,100 in 2023.
“This may go down … as the most consequential thing that we will have done to fix the long-term financial health for the county,” Knochelmann said, addressing the commissioners. “It’s the right thing to do. It’s a tough thing to do.”
County officials voted unanimously to enact the tax increase.
Fast-forward to January at the Kenton County Mayors Group meeting in Fort Mitchell, where mayors from most of the county’s cities – as well Knochelmann and the county commissioners – packed the city’s community center.
“There has been no discussion about how this extra money is going to be used,” Covington Mayor Joe Meyer said.
Meyer went on to say that “the stacking of the county tax on the city tax represents a major change in public policy.”
He then summarized changes that had occurred in Kentucky statute relating to city tax credits and the process behind raising business taxes. Most notably, he referenced a change that occurred in 2021 with the passage of Kentucky House Bill 249, a revenue bill that amended Kentucky statute to allow fiscal courts in counties with more than 30,000 people to increase payroll tax rates without a public referendum.
“That’s a huge public policy change,” Meyer said, “and it occurred without any discussion or notice to the public.”
In response, Knochelmann said that the issue the court was attempting to solve was the “balance of revenue generation” between payroll and property taxes.
He added that if the wage and profit caps had not been raised, “the county would long-term (and) short-term be in a very, very horrific financial condition.”
Knochelmann said he could have been more transparent with the court’s decision, but he defended the court’s actions, characterizing the previous $25,000 cap as outdated and insufficient to meet the county’s service needs.
The judge/executive also said the raised rates would not disincentivize new businesses from moving to cities in Kenton County: “It doesn’t affect economic development.”
But Meyer wasn’t buying it.
“The whole fundamental issue is that by increasing the tax and then stacking it on top of the city tax, the effective payroll tax rate for Covington workers went up to 3.36%,” Meyer told LINK nky in August.
The previous year’s combined city and county occupational tax rate for Covington residents was 3.16% for workers making under $25,000. In 2023, the combined rate jumped up to 3.36% for workers making $80,010 or less.
For years, Meyer said, the business community held it as “common wisdom” that the city payroll tax rate was already a disincentive for economic development and job growth.
Now, Meyer said, “What’s 3.36% going to do?”
Many of the city officials at the January mayors meeting shared his concerns that the new county tax rate, which would get stacked on top of municipal rates, would discourage businesses and jobs from coming into their cities. On top of that, officials said they felt uneasy about the way in which the county passed the tax ordinance on election night when everyone was busy at the polls.
Is the new tax rate excessive? What about Knochelmann’s rationale that the change was necessary to ensure the health of the county?
It’s not quite that simple. Let’s rewind back even farther.
Taxes on wages, business profits and property are among the primary means by which counties fund their operations, but Kenton County has not always had a payroll tax.
Kentucky state law allowed county fiscal courts to levy occupational taxes starting in 1966. In 1978, the Kenton County Fiscal Court put a measure on the ballot asking county residents to levy an occupational tax of 0.4% on the first $25,000 of a person’s wages and the first $37,500 of a business’s net profits. The ballot measure also allowed the fiscal court to raise taxes up to 1% in the future without a vote.
Residents of Kenton County at the time voted to enact the 0.4% tax rate.
Over the years, lawsuits and legislative decisions at the state level have changed how fiscal courts can levy taxes. For a time, cities could credit occupational taxes in their municipalities toward taxes owed to the county. Likewise, counties could levy additional taxes without a vote for a time.
Fast-forward to 2021, and state law required a popular vote to increase occupational tax rates, but credits toward county taxes were valid only if cities and counties mutually agreed to them.
During the 2021 legislative session, Kentucky Sen. Chris McDaniel (R-Ryland Heights), who serves as co-chair of the state’s appropriations and revenue committee, in coordination with county officials used an amendment to House Bill 249 to strike the requirement for a public vote to increase taxes.
By the Numbers
During his presentation in November, the Kenton County treasurer argued that about 65% of the county’s tax revenue came from property tax, with the remainder coming from occupational taxes. LINK nky’s analysis of the county’s financial statements didn’t yield quite the same percentages, but the treasurer’s contention that the county leans disproportionately on property tax revenue has been broadly true over the last five fiscal years. With the addition of the new occupational taxes, which took effect on Jan. 1, that gap has closed a good deal.
McDaniel summarized the county’s rationale for changing the county taxes this way: “[Many] Kenton County-ians work outside of the county… We were beginning to place a disproportionate tax burden on Kenton County residents.”
When all forms of funding are taken into account, the county rarely meets the amount of money it projects to spend. In addition, the county brought in more money than it spent in fiscal years 2021, 2022 and what’s been collected so far for 2023.
“Cities and counties, unlike the federal government, have to have a balanced budget,” Knochelmann told LINK nky in May. “But here’s the caveat: By definition, your budget can be balanced by your reserves.”
A county can use its reserve cash to balance a budget if its expenditures exceed its revenue. The problem, Knochelmann said, is when a jurisdiction becomes too dependent on its reserves to keep the budget balanced. It’s unsustainable as a financial model.
“Kenton County has been squeezed financially” over the past 20 years or so through the terms of multiple judge/executives, Knochelmann said, and he witnessed the county’s attempts to rein in expenditures during his time as a county commissioner before he became judge/executive.
“We cut and we cut, and we didn’t spend,” Knochelmann said. “We balanced the budget, and we got by. And so the point is, eventually you can’t get down and scrape to the very bottom of the barrel forever.”
Eventually, Knochelmann said, “We’ve got to pay people. We’ve got to invest in our equipment.”
According to Knochelmann, the two biggest expenses for the county are the Kenton County Detention Center and the county roads. Financial statements indicate that both the county’s road fund and the jail fund usually spend more money than they make, although the gaps began to close in the last fiscal year.
Historically speaking, the roads have been funded largely with taxes on insurance, and the jail has gotten its funding from a combination of reimbursements from the state, grants and funding from other funds in the budget. The statements don’t break down exactly which funds funneled revenue into the jail, but they indicate that the jail fund got about $11 million of its $17 million total revenue from other county funds in fiscal year 2022.
Prior to July 1, occupational tax collections were shuttled into a separate fund in the budget, called the county occupational license tax, or COLT, fund.
The fiscal court recently released its budget appropriations for fiscal year 2024. The budget projections show that occupational taxes will be moved instead into the county’s general fund. Kenton County has apportioned about $24 million in occupational tax collections for the 2024 fiscal year, compared to the roughly $17 million apportioned in the previous year. Much of the money is being labeled under the “contingent appropriations” category, which usually refers to money that hasn’t yet been assigned to a specific operation.
For his part, Knochelmann defended both his coordination with McDaniel and his rationale for increasing the rates.
“It’s about being an adult in the room and saying you’ve got to pay your bills,” Knochelmann said. “I don’t care if you’re Democrat or Republican. These are basic-level services that you can’t do without.”
He expounded on the sorts of services he meant: Even if the county doesn’t provide city-based policing, for example, it’s still responsible for the detention center and dispatch services.
He also was skeptical of Meyer’s concern that the change would drive out potential businesses and job creators.
At the January mayors meeting, he said, “It doesn’t affect economic development.”
On the contrary, he argued. Improved financial stability across the county would do more to draw in new businesses, which would be attracted to the region’s communal stability.
And, he reiterated, the adjustments to occupational taxes would allow the county to reduce its property taxes.
Recent meetings of the Kenton County Fiscal Court seem to bear this out. At a meeting on Aug. 15, the court completed a first reading of the new fiscal year’s county property tax rate — 13.3 cents for $100 of property a resident owns. This would be a reduction from last year’s rate of 14.4 cents per $100. It’s also below the compensating rate — or the rate needed to draw in the same amount of revenue in the preceding year — of 13.4 cents per $100.
The court was scheduled to complete a second reading and vote on the new rate on Aug. 29.
“When I leave this government, this Kenton County will be in the best financial position it’s been in in probably 50 years,” Knochelmann said. “And that’s what I want.”
As it relates to both the county ordinance and state legislation, “They’re definitely abiding by what I would say was the legislative intent back in the 20th century that subsequently was changed, which kind of changed the financial trajectory of the county,” McDaniel said. “I’m happy to see that they’re trying to make that shift towards fairness.”
What does this mean for the future?
Knochelmann admitted that the reality of the new revenue generation won’t be truly understood for several months once collections and accounts have been reconciled, and he said that he would be open to adjusting the rate and caps in the future if warranted.
Although not every community in Kenton County will be equally affected by the tax increase, larger metro areas like Covington and Erlanger that rely on businesses for their income aren’t happy.
Meyer, for one, isn’t buying the county’s rationale that they need the money to provide services, especially since Kenton County, compared with other counties in Kentucky, is much more carved up in terms of which jurisdictions provide which services.
“Jefferson and Fayette counties happen to be consolidated governments, where the county government is responsible for all the city services. Boone County is functionally the same way because they just have the three cities,” Meyer said. “In Kenton County, the fiscal court does not offer city services. They don’t offer a single quality-of-life service … The water district and the sanitation district are independent regional bodies that are financially self-sufficient. So they’re going way beyond their role as a limited, restricted government.”
Regular people who live and work in Kenton County are already seeing their take-home finances affected.
“Roughly, somebody who makes $80,000 a year is going to pay an additional $550 in tax” per year, said Dawn Hayes, tax manager with Payroll Partners Inc., an Alexandria-based payroll processing firm.
Payroll Partners services about 500 businesses in Kenton County. Hayes offered insight into how the new taxes have affected residents and businesses, as well as observations on the county’s business landscape broadly.
Hayes put a caveat on her previous statement by saying, “Kenton County had extremely low rates and a low wage base to begin with.” In other words, the amount of money Kenton County took in from wages was low compared to other jurisdictions.
In addition, the pandemic brought changes to labor arrangements with the expansion of work-from-home policies, which had the effect of drawing payroll tax revenue out of the local area as people began generating payroll tax revenue where they were completing their work, which was often outside of the county cities, Hayes said.
Covington has already felt the pains of dwindling payroll tax generation due to work-from-home policies. The city’s largest employer, Fidelity, which employs about 5,500 people out of its Covington office, only requires its employees to be in the office five days out of the month. This means that if they’re not working in Covington’s office, the city isn’t collecting taxes on their wages. The same is true if they’re not working in Kenton County.
The changes haven’t affected Kentucky alone.
“Cincinnati has a $9 million budget shortfall, and a lot of Cincinnati’s issues are also related to shifting to work from home,” Hayes said. Official statements from the City of Cincinnati indicate an expected $9.5 million deficit by fiscal year 2025, which officials attributed to work-from-home policies.
Other jurisdictions, such as Union in Boone County, have also instituted payroll tax increases to offset the revenue lost due to changing labor policies, Hayes said. Some jurisdictions, such as Mason County, have instituted their first occupational taxes in an effort to prevent deficits.
Payroll Partners itself offers flexible work arrangements for its people, depending on their jobs, Hayes said.
“We have businesses that are moving out of downtown, industrial areas of major cities,” Hayes said, “and they are struggling with the budget deficits that creates.”
This situation has the potential to create a grim feedback loop — changes in labor policies reduce payroll tax income, which leads to budget shortfalls, which can prompt jurisdictions to increase their tax rates to offset the losses, which can drive out more business, potentially reducing revenue even more.
Even with Kenton County’s projected increase in occupational tax collections, projected overall revenues for the county are expected to decline by about $11 million in the 2024 fiscal year. The 2024 budget book suggests that property tax collections will be roughly the same as 2023.
For many who have leveled criticism at the county, the issue is less about the numbers and more about the way in which they’ve been ramped up.
Hermes, who also spoke directly with LINK nky in August, admitted that understanding tax policies and trying to compare them across jurisdictions is difficult.
“You can’t look at one piece and say, ‘Oh, well, we’re not competitive because of this one tax,’” Hermes said. “You have to look at the whole thing, and people don’t do it typically because it’s not easy to look at.”
Hermes believed that the county’s projections were likely speculative based on conversations he’d had with leaders in his network.
Still, the overall increase, both in the cap and the rate, boggled his mind.
“It’s obscene,” Hermes said.