Kentucky Enacts Law Permitting Local Governments to Tax Land and Buildings at Different Rates

FRANKFORT, Ky. — The Kentucky General Assembly has enacted a law authorizing the state’s consolidated local governments to sub-classify real property, allowing them to tax land and the improvements upon it at different rates. The measure, which became law after the legislature overrode a gubernatorial veto, marks a significant shift in municipal finance policy and could pave the way for a split-rate property tax system in jurisdictions like Louisville.

The new legislation empowers the council of a consolidated local government to create two distinct sub-classes for real property: land and improvements. This diverges from the traditional ad valorem property tax system, where a single tax rate is applied to the total assessed fair cash value of a property, which includes both the land and any structures on it. By separating the two, a local government could, for example, levy a higher tax rate on the value of the land itself while applying a lower rate to the value of buildings, factories, or commercial facilities.

This authority is rooted in Section 171 of the Kentucky Constitution, which grants the General Assembly the power to divide property into different classes for taxation purposes. The constitution mandates that taxes must be uniform upon all property within the same class and within the same territorial limits. The new law leverages this power to create a more granular system, allowing for differential treatment within the broader class of real property.

Proponents of such a system, often referred to as a land value tax or split-rate tax, argue it can be a powerful tool for economic development. The primary goal is to incentivize the productive use of land, particularly in urban cores or commercial districts. By increasing the tax burden on vacant or underutilized parcels, such as surface parking lots in high-demand areas, the policy encourages owners to either sell the land or develop it to generate income sufficient to cover the higher holding costs.

Conversely, a lower tax rate on improvements—the buildings themselves—can reduce the financial penalty for new construction or for renovating and expanding existing structures. This could spur investment in commercial and industrial facilities, potentially leading to job creation and an expanded local tax base. The policy is designed to shift the tax burden from productive capital investment toward the passive ownership of land.

This approach aligns with other tax-based economic development strategies already employed in Kentucky. According to the Lincoln Institute of Land Policy, the state authorizes local governments to freeze assessed property values for up to five years for the rehabilitation of structures that are at least 25 years old. Kentucky also offers a significant tax credit against the property tax on aging barrels of bourbon, a measure designed to encourage capital improvements within its signature distilling industry.

For businesses and commercial property owners in Kentucky's consolidated local governments, the most prominent of which is the Louisville/Jefferson County Metro Government, the new law introduces a new variable into real estate strategy. The immediate impact will depend entirely on whether the local council chooses to exercise this new authority and what specific rates they set for land versus improvements.

If implemented, businesses owning valuable but underdeveloped land could face substantially higher tax bills. This could affect companies with large land footprints, such as logistics centers, manufacturing plants with extensive grounds, or retailers with large parking lots. In contrast, businesses operating in multi-story buildings on smaller urban parcels might see their tax liability decrease, as a larger portion of their property's value is tied to the structure rather than the land.

Kentucky's property tax system is already complex. Each of the state's 120 counties elects a property valuation administrator (PVA) responsible for assessing all property at its "fair cash value," defined as the price it would command in a voluntary sale. The state has more than 20 designated classes of property, and local entities including counties, cities, and school districts set their own tax rates. The new law adds another potential layer of complexity for businesses to navigate.

While the goal of incentivizing development is clear, this new sub-classification authority introduces significant uncertainty for property owners and businesses in affected jurisdictions. A shift to a split-rate tax is not a simple rate adjustment; it is a fundamental change in how property is valued for tax purposes. Businesses that own their real estate, especially those with large land holdings, could see their tax liabilities change dramatically, impacting cash flow, budgeting, and long-term investment decisions. The valuation of land separate from improvements will likely become a new, critical point of analysis and potential appeals for commercial property owners.

In our experience, navigating these kinds of localized, structural tax changes is a major challenge for companies that lack dedicated tax expertise. It requires proactive analysis of a company's entire real estate portfolio and careful financial modeling to understand the potential bottom-line impact. Our team focuses on exactly this type of state and local tax preparation and compliance. For businesses concerned about how this new split-rate system could affect their financial planning, the first step is a thorough review of their property assessments and tax strategy. We help clients through this complex process to ensure they are prepared for any changes. Business owners can learn more by contacting C&S Finance Group LLC at csfinancegroup.com.

With the law now on the books, attention will turn to the local legislative bodies of Kentucky's consolidated governments. The next steps will involve public debate and fiscal analysis as these councils consider whether to adopt a split-rate system. Observers will be watching closely to see if and how this new taxing authority is implemented, as its application could set a precedent for municipal tax policy across the Commonwealth.