Kentucky Corporate Minimum Tax Comes Under Fire

Published May 1, 2007

Despite a top lawmaker’s claim that Kentucky’s alternative minimum calculation (AMC) tax, also known as a gross receipts tax, is “un-American,” it appears the business levy will remain in place at least until the state’s next budget is considered in 2008.

Few of the state’s leading political figures have made the issue a high priority during the current political campaign, which has nearly as many gubernatorial candidates as American Idol has competitors. One of those candidates–incumbent Republican Gov. Ernie Fletcher–promoted adoption of the AMC in 2005 and continues to defend the levy.

Pressure applied by the state’s small business lobby resulted in lawmakers adjusting the policy last June. The revised plan immediately exempted businesses with gross receipts of less than $3 million. It also phases out the tax on companies with between $3 million and $6 million in revenue.

But lawmakers left in place a portion of Fletcher’s tax policy requiring all companies doing business in Kentucky to pay a minimum “fee” of $175.

While the adjustments made last year were touted by political leaders as offering tax relief for about 70,000 businesses in the state, all of those companies–regardless of whether they are profitable–will pay the minimum fee, providing a $12.3 million annual windfall for the state government.

Candidate Calls for Repeal

One gubernatorial candidate is making AMC repeal an important part of his campaign.

Western Kentucky businessman Billy Harper, seeking the Republican nomination for governor, says there’s plenty of evidence supporting a need for immediate repeal of the tax. Harper owns and operates a manufacturing firm that does business in Kentucky and other states. He says he has seen the effects of taxes like the AMC up close.

“Taxing unprofitable businesses, whether they’re based in Kentucky or have headquarters elsewhere, is not the way to improve this state’s business climate,” Harper said in a statement in response to Fletcher, who claimed before the Kentucky Association of Manufacturers on February 12 that the tax would capture revenue from out-of-state firms operating in Kentucky.

“Further, we shouldn’t discourage out-of-state businesses from operating here, hiring Kentucky workers, and contributing to the state’s economic development,” Harper said.

Democrat Calls Tax Un-American

Democratic Party gubernatorial contender Jody Richards, who currently serves as House Speaker, told reporters the tax is “un-American” because it punishes initiative and taxes businesses on gross receipts, not profits–meaning even companies that lose money must pay the tax.

Despite his belief the tax is un-American, Richards did not commit to push for repealing it this year. Instead, he would say only that he and fellow House leaders would consider the issue.

Economic data provided by state budget officials show that since the alternative minimum calculation was signed into law in 2005, revenue from corporate taxes has increased dramatically. According to State Budget Director Brad Cowgill’s office, corporate income tax revenues increased 109 percent during the first year following passage of the AMC.

Budget officials say it’s impossible to determine how much of that revenue was specifically generated by the AMC. But as proof the tax is gouging the state’s economy, critics point to other indicators–such as the paltry 6 percent growth in sales and use tax revenues during the AMC’s first year–which many consider to offer genuine clues about a state’s economy.

Employment Dropped

Another clue may lie in Kentucky’s employment climate. The state’s Department of Labor reports that in 2005, Kentucky firms laid off 55,000 workers, an increase of 46 percent compared to the previous year.

“If they don’t act to repeal the AMC now, they will simply collect millions of dollars of scarce resources that entrepreneurs would normally use to build their businesses,” said Chris Derry, president of the Bluegrass Institute, a public policy organization.

“Not repealing this now only sends the message that out-of-state companies that may be looking to expand, or entrepreneurs wanting to start a new venture, should operate somewhere else other than Kentucky,” Derry said.

Jim Waters ([email protected]) is director of policy and communications at the Bluegrass Institute for Public Policy Solutions in Bowling Green, Kentucky.