EKY city to ask Supreme Court to upend the state’s restaurant tax system
The Kentucky Court of Appeals has denied a petition for a rehearing from an Eastern Kentucky city attempting to levy a 3% restaurant tax, but the city’s attorneys intend to appeal the ruling on the grounds the amended state law underpinning local taxing authority is unconstitutional.
Hazard, still coming to grips with the devastating loss of its coal-mining industry, finds itself caught in a tense legal battle with other Kentucky cities and the state government over the right to adopt a tourism tax leaders say could help rebuild the city’s economy.
In October, the appeals court overruled a circuit opinion in October that allowed the city to put a tax on restaurant bills to fund a joint, city-county tourism board.
Monday, the Hazard City Council rolled that tax back, and the $1 million in escrow collected since January now sits in limbo, and no one seems to know who decides how or even whether it can be spent.
At issue is an arcane system for classifying cities according to population size and the power of smaller Kentucky cities to charge a restaurant tax based on their classification. When the state got rid of the six-tiered city ranking system in 2015, it left out cities whose populations had not yet been updated to reflect that authority.
The General Assembly chose a seemingly random date — Jan. 1, 2014 — and used it to take a snapshot of every city’s classification to determine whether they could charge a restaurant tax. Hazard officials say its classification was way off on that date, and they claim the legislature’s method for determining municipal authority was unconstitutional, especially since the state hasn’t come up with a way to modify classification errors.
“We just want to be on an equal playing field with everybody else,” Mayor Donald “Happy” Mobelini said. “How’s it fair? How’s it fair that a city the same size as us or the city that may have 39,000 people is able to enact [such a tax] and then, when we hit every criteria, we can’t?”
Nine Kentucky cities intervened in the case when Hazard first filed suit against the state in Franklin Circuit Court in 2023. Bardstown, Berea, Elizabethtown and Madisonville — all of which levy a restaurant tax even though their populations exceed the historic limits for fourth- and fifth-class designation — argued Hazard’s constitutional claims could implicate them.
They were taking advantage of the state’s once-lax approach for keeping city classification in line with population, and Hazard’s attempt to rectify that mistake would embroil them, the cities claimed.
But the fact that larger Kentucky cities are using a restaurant tax flouts the clear intent state lawmakers had for giving smaller places the ability to fund local tourism and compete with larger municipalities whose transient hotel or Airbnb taxes could support them, said Eddie Jones, a defense attorney in Paducah representing Hazard in its bid for Kentucky Supreme Court review.
“The true intent was, all right, second- and third-class cities, you guys get a hotel tax,” Jones said. “Fourth-, fifth-class cities, we get it: You’re too small; you don’t have hotels. You get a restaurant tax.”
On one hand, the Kentucky General Assembly never proved all that good at keeping classifications up-to-date, and it also granted cities permission to move up and down before being frozen in time when the tiered system ended.
That left cities like Hazard, officially a third-class city but whose population sits well within the original fourth-class range, barred from enacting the tax. Yet, larger cities such as Elizabethtown — estimated population 34,565 — are using a tax Jones said was intended for cities of 8,000 people or fewer.
At least 85 Kentucky fourth- and fifth-class cities were misclassified strictly by population when the state formally put an end to the six-tiered system, according to a Herald-Leader analysis of population data and court records. At least 13 of those were levying a restaurant tax in 2023 even though their populations exceeded or fell below the 1,000- to 7,999-resident limit.
“Some of these counties are paying tourism coordinators or directors $75,000-$100,000 a year,” Hazard-Perry County Tourism Executive Director John Epperson said. “I’m working for 24 hours a week for $15 an hour in order to keep it moving forward in our county, in our community, for our people.”
Legal drama unfolds and neighbors fight back
Hazard has served as a case study for the decline of coal-mining industry jobs in Central Appalachia that began in 2007 and rapidly accelerated about a decade ago. From 2011 to 2020, the region lost nearly 15,000 mining-related jobs. Since then, Perry County has maintained a 33% decline, according to the U.S. Bureau of Labor Statistics.
Mobelini says he has been desperate to find a way to bring in visitors and stimulate the slumping economy. In October, the city helped relocate the welcome center to a more prominent location downtown that would give Epperson and his staff of three a leg up to tell the city and county’s story.
The region’s rugged mining past has made it prime location for adventure tourism that leans on its isolated, scenic location on the North Fork of the Kentucky River and in the heart of ridge-and-valley Cumberland coal country.
“We have so many opportunities to attract tourism to our county and region right now,” said Betsy Clemons, executive director of the Hazard-Perry County Chamber of Commerce. That’s why she said the business community supports the city council’s legal fight for a restaurant tax, because even restaurants that pass those costs on to their consumers understand the good it could do for the community.
But Epperson believes there are even more opportunities to create tourism destinations. Property northeast of the city on Kentucky Highway 80 is for sale, and he envisions a children’s sports complex nearby that could support tournaments and traveling Little-League events. A hotel developer expressed interest in building in that area with support from the city’s restaurant tax revenue.
In its lawsuit against the state, Hazard pointed to much larger cities, such as Elizabethtown, which preserved its fourth-class designation for years against pushback even from local city officials.
The city’s population should make it second-class, ineligible to levy a restaurant tax, but it enacted one anyway in 2007 and has leveraged the more than $3 million it generates annually to construct a $29 million sports tourism park that drew national attention and has become a prized destination on the summer Little-League circuit.
“We have no objection to Hazard imposing a restaurant tax if the legislature would authorize it,” Elizabethtown city attorney Ken Howard said. “Their attitude seems to be more, ‘If we can’t have it, you can’t either.’”
Elizabethtown and other cities that joined the lawsuit against Hazard say they have outstanding bonds that rely on preserving the status quo. If Hazard’s attempt to get the state’s permission to levy a tax perseveres in court — especially on the grounds the law is unconstitutional — it could upset the careful balance they have maintained to generate millions in annual tourism revenue.
Franklin Circuit Judge Phillip Shepherd’s initial May 2024 ruling that the state’s amended restaurant tax law was unconstitutionally arbitrary could have left the amended law too vague and confusing, Elizabethtown and other intervening cities argued in court.
Shepherd amended his order later that year to make it clear Hazard alone would be granted special permission to levy the tax, but that carve-out is what the appeals court took issue with in its October ruling, Jones said.
Ultimately, it should be up to the legislature to fix the mistake that has left Hazard out, Howard said. The Kentucky League of Cities, which has been careful not to take a firm position on either side of the ongoing litigation, has lobbied the General Assembly to grant restaurant tax authority broadly. But lawmakers are leery of putting their names behind any legislation that could increase taxes, even local ones, KLC Executive Director and CEO J.D. Chaney said.
Plus, while the issue is being litigated, it’s likely to encounter an unspoken policy maintained by Frankfort lawmakers to avoid legislating on issues snaking their way through the courts, Chaney said.
“It’s easy to be sympathetic to the Hazard’s position that, well, the legislature hasn’t done it, so, yeah, our only course of action here is to try to see if the courts can find some weakness in the legislative structure that would allow us to do it,” he said. “The issue in doing so, though, is challenging the entire constitutionality of it could affect cities that have built and financed facilities.”
This story was originally published December 19, 2025 at 5:00 AM.
