Com., Revenue Cabinet v. Smith

Decision Date24 March 1994
Docket NumberNo. 93-SC-946-TG,93-SC-946-TG
Citation875 S.W.2d 873
PartiesMedicare & Medicaid Guide P 42,606 COMMONWEALTH of Kentucky, REVENUE CABINET; Kim Burse, in her official capacity as Secretary; Kentucky Revenue Cabinet; Commonwealth of Kentucky, Cabinet for Human Resources; Fontaine Banks, Jr., in his official capacity as Secretary; Kentucky Cabinet for Human Resources; Kentucky Health Care Date Commission, Appellants, v. Charles C. SMITH, Jr., M.D.; Fred L. Barnett, M.D.; William B. Monnig, M.D.; Kentucky Medical Association; Stuart G. Yeoman, M.D.; Tim Hulsey, M.D.; Joe Davis, M.D., President, Warren County Medical Society; Joseph Janes, Appellees.
CourtUnited States State Supreme Court — District of Kentucky

Leonard G. Rowekamp, Smith, Wolnitzek, Schachter & Rowekamp, Covington, Cathy Cravens Snell, Dana B. Mayton, Revenue Cabinet, Division of Legal Services, Masten Childers, II, Edward D. Klatte, Stanley A. Stratford, Office of the Counsel, Cabinet for Human Resources, Frankfort, for appellants.

Bruce F. Clark, C.J. Cronan, IV, Mark Overstreet, Timothy C. Kimmel, Stites and Harbison, Frankfort, Kent Masterson Brown, Cristopher J. Shaughnessy, Lexington, for appellees.

REYNOLDS, Justice.

This appeal is from the final judgment of Franklin Circuit Court for which transfer was granted. CR 74.02. The enactment of House Bill 1, "the provider tax," (codified as KRS 142.201-142.259 and KRS 216.270-216.287), was the subject and product of an extraordinary session of the 1993 Kentucky General Assembly. The trial court determined that a tax on physicians violated Section 59(15) of the Kentucky Constitution. To the extent provided in this opinion, we reverse the lower court's decision and hold that the health care provider tax as applied to physicians is constitutional.

Under the Medicaid program, of the 7,132 Kentucky licensed physicians and clinics, 4,514 treat and provide services to Medicaid patients. Under House Bill 1, a 2 percent of gross revenue tax was imposed on physicians' services and the tax proceeds are utilized to obtain federal matching money to support Kentucky Medicaid. Thirty-one percent of the state's share of the Medicaid expenditures is derived from the providers' tax monies which are available for the matching funds. The state's general fund provides the rest of the state's share. The question is whether the General Assembly lacks the ability to define the class of providers being taxed.

It is neither the wisdom or expediency of this legislation that concerns the court, for that is a matter for the legislative branch of our government. The sole duty herein is scrutiny of the act in light of the constitution.

It is the specter of unconstitutional classification that has formed the basis of appellees' argument. The broad discretion as to classification which a legislature possesses in the field of taxation has long been recognized. Discretion is needed in the formulation of basic and sound tax policies and classification is appropriate for fitting tax programs to both usages and needs. It has been held, because of these factors, that in taxation, more so than in other fields, the legislative bodies possess the greatest of freedom in classification. Madden v. Kentucky, 309 U.S. 83, 60 S.Ct. 406, 84 L.Ed. 590 (1940). Courts, under a rational basis review, accept the legislature's generalizations even when there is an imperfect fit between means and ends. Heller v. Doe By Doe, --- U.S. ----, 113 S.Ct. 2637, 125 L.Ed.2d 257 (1993). Further, in a taxation case, unless a rational basis for such law can be completely refuted, then the law may stand as constitutional. Notably, the burden on the ones attacking the legislative tax arrangement is the negation of every conceivable basis which might support it.

Vital state interest does, in fact, in this case mean vital state interest as this state provides medical care to over 500,000 Kentuckians, which is over 14 percent of this state's citizenry, under the provisions of the Kentucky Medical Assistance Program (Medicaid). There is an established federal criteria for states to obtain federal matching funds for the Medicaid program and it was amended in 1991, necessitating a state change. Therefore, to qualify for federal matching money, any tax on health care providers was required to be uniform and broad based within each class of taxed providers. Omitted was the ruse of hold harmless provisions whereby the participating physicians were permitted recoupment.

In this case, were the state to run afoul by imposing a tax considered impermissible under the federal regulations, there would occur a reduction of the state's total medical assistance by the amount of any impermissible health care tax that is collected. This act under consideration applies to all permissible health care providers, whether or not they participate in the Medicaid program, and complies with federal criteria because of its uniformity and broad base. The annual provider tax revenues generated by the act have been legislatively estimated to be approximately $147 million, of which $32.4 million is attributable to the tax on physicians.

Franklin Circuit Court reasoned that the 2 percent tax on physicians' gross revenues provided for in House Bill 1 violated Section 59 of the Kentucky Constitution, which prohibits special legislation, and utilized the cases of City of Louisville v. Kuntz, 104 Ky. 584, 47 S.W. 592 (1898) and Board of Educ. of Jefferson Co. v. Board of Educ. of Louisville, Ky., 472 S.W.2d 496 (1971), as supportive of its position. Noted, but without discussion, was that the tax was not limited to 60 percent of the physicians that participated in the Medicaid program, but applied to all physicians rendering health care services in the state. Thus, it was concluded that the increase in funding and the indirect benefit to only 60 percent of the doctors who did participate in providing services did not support a rationale for overcoming Kentucky Constitution Section 59(15). The classifications were deemed to be illogically related to the purpose of the act. We find such conclusion unacceptable.

The enacted legislation and federal criteria as to qualification for federal matching money forms a rational basis in the General Assembly's actions resulting in House Bill 1. These federal mandates were not illusionary, but were real and pressing at the time of the legislation. Simply put, the Kentucky statute was designed to meet the federal statute which provides and enumerates the specific requirements as to the class of health care providers that may be taxed in order to qualify for matching funds. The trial court was in error by finding the classifications illogically related to the purpose of the act.

The mammoth scope of the Medicaid program provides such an enormous subsidy to the health care system so as to benefit all health care providers, whether they participate in direct reimbursement provisions or not. It follows that it is not illogical for the General Assembly to tax the health care industry for 31-plus percent of the state's funds which are to match the scope of the much larger federal funds. The prevalence of provider taxes serves to establish the perimeters of the class providers who could be taxed to fund Medicaid. The Kentucky statute, as the parties appear to concede, is coextensive with the federal law. Thus, when a state elects to enact a provider tax, its discretion in classifying those who will be taxed appears circumscribed by federal law. Thus, defining the class in a coextensive manner with the federal law results in a rational basis for such classification without arbitrariness. The act delineates the class of entities subject to the tax and, thus, the General Assembly necessarily excludes and includes certain entities within the scope of the tax. Judicial approval given to legislative classifications for tax purposes appears to be well established. Department of Revenue v. Spalding Laundry and Dry Cleaning Co., Ky., 436 S.W.2d 522 (1968).

It has been further established that classification is permissible when it appears as a natural method of legislation, as long as the classification is neither unreasonable nor arbitrary and, thus, applies equally to all in a class. Schoo v. Rose, Ky., 270 S.W.2d 940 (1954). A requisite, therefore, is the rationality of the basis as between the classification established and the governmental purpose to be achieved. As there is no suspect classification in this case, the act meets the rational basis standard to be deemed constitutional.

Section 59(15) of the Kentucky Constitution prohibits "local or special acts" which are "to authorize or regulate the levy, the assessment or the collection of taxes...." The primary purpose of Section 59 and the 29 subsections is the protection of Kentucky's citizenry from special interest groups. Tabler v. Wallace, Ky., 704 S.W.2d 179 (1985), cert. denied, 479 U.S. 822, 107 S.Ct. 89, 93 L.Ed.2d 41 (1986). Reasons of a positive nature are necessary for justifying the legislation.

To overcome freedom of classification and the presumption of validity requires an explicit demonstration that a tax is hostile and oppressive against particular persons and classes. Delta Air Lines, Inc. v. Com., Revenue Cabinet, Ky., 689 S.W.2d 14 (1985). State tax statutes provide many examples of classifications and due process, and equal protection analysis in tax matters requires the court to determine simply whether there is a rational basis for the legislative action. Federal Communications Commission v. Beach Communications, Inc., --- U.S. ----, 113 S.Ct. 2096, 124 L.Ed.2d 211 (1993); Reynolds Metal Co. v. Martin, 269 Ky. 378, 107 S.W.2d 251 (1937).

The populace, as a whole, derives benefits from a healthy citizenry. The providers of health care may receive immediate and direct results of a fund that pays their charges/fees for treatment of the indigent. No physician taxed is prohibited from...

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