Cities Want Kentucky to Shelve Telecom Tax

(CN) - Four Kentucky cities and a nonprofit want a circuit court judge to declare the state's telecom tax unconstitutional, saying it is costing them millions of dollars in revenue in tough economic times.

The tax, officially known as the "Multichannel Video Programming and Communications Services Tax," was passed in 2005 to replace local public service property taxes and local franchise fees on cable and telephone companies.

Kentucky legislators enacted the measure to simplify the tax structure for telecommunications providers by having the state collect the fees and distribute them to local municipalities. But city officials now say this structure is taking a toll on their budgets, with an estimated shortfall of $17 million since collection of the tax began on Jan. 1, 2006.

Some local municipalities are reporting that they are struggling to provide essential services to their residents because of the loss in revenue.

City governments were promised - through a hold-harmless clause in the legislation - that they would not see a change in funding from the previous way they collected taxes, according to the complaint. Before the law went into effect, cable and phone companies needed to obtain local government permission to use roads and other rights-of-way to bury cable lines. The municipalities said they would grant permits in exchange for franchise fees.

The four cities in the lawsuit - Florence, Winchester, Greensburg and Mayfield - are asking the court to order the return to the franchise-fee system by declaring the telecom tax unconstitutional.

The lawsuit, filed Sept. 23 in Franklin Circuit Court, points to Sections 163 and 164 of the Kentucky Constitution as expressly granting cities the authority to levy franchise fees for municipal rights of way.

Named in the lawsuit are Lori Hudson Flanery, secretary of the Finance and Administration Cabinet, and Thomas Miller, commissioner of the Department of Revenue.

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