This telecommunication tax – sometimes called a franchise fee – is controversial among bill payers but has served as a steady funding stream.
With cable companies shedding subscribers and customers cutting cords – Charter and Comcast lost 90,000 and 34,000 video subscribers respectively just last quarter – some municipalities may be wondering if they can rely on traditional media franchise fees to maintain their bottom lines.
Kentucky cities and counties don’t seem to have those worries at the moment; most have no idea what percentage they are receiving from cable and satellite companies, how the use of their properties are being priced and how negotiations are made.
David Smith, Daviess County director of legislative services, said this blind spot among local governments stems from tax legislation taking franchise fees out of their control.
“The tax was advertised as a way to level the playing field, but it took control out of our hands,” Smith said. “Before, we could set any tax rate we felt appropriate. No one is quite sure how rates are made now. If a city sees growth, franchise fees seem consistent.”
The Multichannel Video Programming and Communications Services Tax passed by the Kentucky General Assembly in 2005 took the process of negotiating fees from local governments and held it under the purview of the Department of Revenue. The state began taxing companies 5.4 percent and distributed it to cities and counties.
Smith said the cable franchise fee was roughly $154,000 in 1995. Now, the county has taken in about $186,000 for the past five years. He said it seemed odd the fee has barely grown even as the population of the county has increased and the state added fees for satellite companies.
Smith said the lack of control has created more problems than stagnant revenue.
“The biggest issues we have is when it comes to complaints,” Smith said. “Most of the complaints we get are things we can’t change. We have no ability to set these rates and no control over quality of service.”
Cities and counties still have the right to create franchise charters allowing companies to use their right-of-ways, but the process is toothless negotiation since the legislation doesn’t allow for local governments to ask for additional payments.
Smith said the county’s charter with Time Warner Cable in 2011 gave them a sort of gift provision allowing Fiscal Court and the school systems to broadcast public programming on one of the provider’s channels. When the company became Spectrum Cable, it ended the service without any consequence.
Angela Hamric, financial director for the city of Owensboro, said she hasn’t seen the fee payments change from about $455,000 a year since she took her position.
Hamric said the city was also bound by lack of information and overview, and that probably wouldn’t change until control was returned.
“Would we like to have control?” Hamric said. “What city wouldn’t? We’re very restricted by the General Assembly on how we tax and how we raise our revenue streams.”
While the state is in charge of collecting and distributing the revenue from media companies and takes a piece of the tax as well, it too seems to have lost control of what it earns through the legislation.
Richard Dobson, executive director of sales and excise tax in the Department of Revenue, said the amount of revenue all levels of government collected was based on an oversight in legislation.
“Neither the state nor local jurisdictions received what was expected,” Dobson said. “The hold-harmless amount was intended to protect localities; if there hadn’t been a hard coded amount and we had been able to calculate the true base of what we were owed, they would have been harmless.”
Dobson said the rate at which media providers pay the state is based on the amount municipalities would have earned from companies when the tax was first enforced in 2006. A “hold-harmless” account of $36.4 million was established from this rate and cities and counties were promised a percentage of distribution with the promise to grow in the future.
That promise was never met and the amount of money paid never increased.
But cities may soon have a path to regaining their ability to negotiate their own franchise fees.
A lawsuit by Florence, Winchester, Greensburg, Mayfield and the Kentucky League of Cities filed in 2014 finally received a judgement from the Kentucky Supreme Court in June overturning the state legislature's power to prevent cities from levying payments on their own infrastructure.
The complainants case rested on a passage in the state’s constitution that used specific language about a city’s ability to control contracts on their own infrastructure and the prevention of companies to use it without proper negotiation. This means counties aren’t secured a path to franchise fees.
Morgain Sprague, managing counsel for member legal services, said some cities have already begun the process of opting out of the state distributions, but how the process will work is still being developed.
“One of the issues we are going to consider is if it's better to do this or stick to the current scheme,” Sprague said. “We really don’t know yet. We’ve been trying to get cities to gather information and understand the impact relying on an approach that’s best for their citizens. It’s really going to be city specific.”
Cities and advocacy groups cited a $7 million shortfall as a result of the legislation, but a League of Cities fact sheet distributed in October warned that some cities may not receive more money through their own negotiations.
With a federal ban on the taxation of internet, Dobson said cities may have a tough decision in switching from the old method of a guaranteed revenue. As customers continue to switch from paid television subscriptions to nontaxable streaming services, media companies may not be in the mood to go to the negotiation table.
©2017 the Messenger-Inquirer (Owensboro, Ky.) Distributed by Tribune Content Agency, LLC.
