May 14, 1992
Frankfort, Kentucky 40601
Dear Senator Schmidt:
By letter of November 18, 1991, you ask that this office respond to the following question:
Does KRS 154.650 to 154.705 constitute special legislation as prohibited by Sections 59 and 60 of the Kentucky Constitution? Specifically, does the statutory scheme set forth in KRS 154.670, limiting the number of enterprise zones, confer a special status on these areas that other areas meeting the criteria for designation under KRS 154.665 do not receive?
In our view, limitation of the benefits under this program to ten areas selected by the enterprise zone authority does in fact confer a special status on these areas, denying benefits they receive to other areas similarly situated. Since unique benefits are provided to designated areas having no natural and reasonable basis to distinguish them from other similarly situated areas, and since the legislation in question exempts certain districts from the operation of general laws, the legislation is both local and special in character, and thus violative of sections 59 and 60 of the Constitution of Kentucky.
I. Structure of the Enterprise Zone Law
In 1982 the Kentucky General Assembly passed legislation authorizing an enterprise zone authority to designate seven areas as enterprise zones. The act provided for exemptions from several types of state taxes, as well as other benefits, in connection with such zones (Acts 1982 c. 131). Designation of three additional zones was authorized by legislation passed in 1986 (Acts 1986 c. 30, � 5). The purpose of the enterprise zone legislation as stated in KRS 154.650 is:
The general assembly hereby finds and declares that the health, safety and welfare of the people of Kentucky are enhanced by the continual encouragement, development, growth and expansion of private enterprise within this Commonwealth. There are certain economically depressed areas in the Commonwealth that need particular attention to create new jobs, stimulate economic activity and attract private sector investment rather than government subsidy to improve the quality of life of their citizens. It is the purpose of KRS 154.655 to 154.705 to encourage new economic activity in these depressed areas of the Commonwealth by means of reduced taxes and the removal of unnecessary governmental barriers to the production and earning of wages and profits and the creation of economic growth.
In order for an area to be considered for possible designation as an enterprise zone, an application must be submitted by a local unit of government (KRS 154.660, KRS 154.662) and the area must meet general criteria set forth in KRS 154.665, which provides:
(1) Any area or areas of a city, county or urban-county government may be designated an enterprise zone which:
(a) Has a continuous boundary, and
(b) Is an area of pervasive poverty, unemployment and economic distress.
(2) An area meets the requirements of subsection (1)(b) of this section if:
(a) The average rate of unemployment in such area for the most recent eighteen (18) month period for which data are available was at least one and one-half (1 1/2) times the average national rate or unemployment for such eighteen (18) month period; and
(b) At least seventy percent (70%) of the residents living in the area have incomes below eighty percent (80%) of the median income of the residents of the city, county or urban-county government requesting designation; or
(c) The population of all census tracts in the area decreased by ten percent (10%) or more between 1970 and 1980 and the city, county or urban-county government requesting designation establishes to the satisfaction of the authority that either:
1. Chronic abandonment or demolition of commercial or residential structures exist in the area, or
2. Substantial tax arrearages of commercial or residential structures exist in the area.
Selection of specific zones for designation is left to the enterprise zone authority based on preferences listed in KRS 154.670(1), which provides in part:
In deciding which areas should be designated as enterprise zones the authority shall give preference to:
(a) Areas with the highest levels of poverty, unemployment, and general distress;
(b) Areas which have the widest support from the government seeking designation, the community, residents, local business and private organizations; and
(c) Areas for which the government seeking designation has made or will make the greatest effort to encourage economic activity and remove impediments to job creation including but not limited to a reduction of tax rates or fees, an increase in the level or efficiency of local services and a simplification or streamlining of governmental requirements on employers or employes, taking into account the resources available to such government to make such efforts.
II. Local and Special Legislation
In engaging in constitutional analysis we are aware of the presumption of constitutional validity of legislative enactments. A liberal construction is given to constitutional limitations, with reasonable doubts being resolved in favor of validity of questioned enactments. Dalton v. State Property and Buildings Commission, Ky., 304 S.W.2d 342 (1957). The wisdom of legislative action and the soundness of its underlying economic theories do not affect an analysis of whether an enactment is constitutional. Hayes v. State Property and Buildings Commission, Ky., 731 S.W.2d 797 (1987).
Sections 59 and 60 of the state constitution prohibit the legislature from enacting local or special legislation. Local legislation is confined to territorial limits other than that of the whole state or . . . applicable to some political subdivision and not to others. Board of Education of Jefferson County v. Board of Education of Louisville, Ky., 472 S.W.2d 496 (1971). Local legislation is valid if it is based on a classification having natural, real, or substantial distinctions inherent in the subject matter. Id. Special legislation arbitrarily or beyond reasonable justification discriminates against some persons or objects and favors others. Id.
We conclude that under either of those two legal standards the enterprise zone law violates sections 59 and 60 of the state constitution. We believe this conclusion necessarily follows from the following observations:
The ten designated enterprise zones do not necessarily represent the ten most economically depressed areas of the state. An enterprise zone comes into existence only upon application by the appropriate local government. If for any reason a local government does not file an application on behalf of an otherwise eligible area, that area is forever excluded from the benefits extended to the designated zones.
The granting of benefits to ten areas on a first-come first-serve basis necessarily discriminates against other areas that might otherwise qualify for benefits on the basis of economic need. We see no possible justification for establishing an arbitrary limit on the number of areas that may receive benefits. There are no natural, real, or substantial distinctions between the tenth economically depressed area in the state and the eleventh.
If the enterprise zone law works as intended, presumably the areas in the zones will at some point no longer exhibit the economic hardship that rendered them eligible for benefits. Nevertheless, even if a zone's designation is revoked, businesses in the zone retain their tax exemptions for a period of twenty years (KRS 154.670(6)), while similarly situated businesses located elsewhere in the state do not qualify for the exemptions.
There are no expressed standards in the law for the selection of the designated zones. The enterprise zone authority is not obligated to select the most economically depressed areas, or the areas with the greatest potential for improvement; on the contrary, the enterprise zone authority is merely given preferences to follow in passing out benefits.
Other examples of the arbitrary nature of the enterprise zone law could probably be cited. The reasons that we have just cited provide ample justification for the conclusion that the enacted legislation violates sections 59 and 60 of the state constitution.
While other sections of the state constitution are clearly implicated by the enterprise zone law, we have confined our analysis to the provisions cited in your letter.
III. House Bill 66
The provisions quoted in this opinion are taken from the statutes in effect as of this date. We are aware that House Bill 66, enacted by the 1992 General Assembly, makes numerous changes to various provisions in the enterprise zone statutes. We have considered House Bill 66 and do not find that it affects the conclusions we have drawn.
We conclude that the following statutes are unconstitutional local or special legislation in contravention of sections 59 and 60 of the state constitution: KRS 154.650, 154.660, 154.662, 154.665, 154.670, 154.680, and 154.690.
Ross T. Carter
Assistant Attorney General