Monday, June 03, 2002

Corporate tax a budget worry

Patton says drop in tax collections are behind budget crunch

        FRANKFORT (AP) — Gov. Paul Patton says erratic corporate tax collections are a big part of Kentucky's revenue shortfall, but he's not sure how to fix the problem.

        Mr. Patton said he is wary about doing something that might damage Kentucky's ability to attract new business.

        But industry executives, pointing to the sluggish economy, say they have to make money to pay taxes. If collections fall, that means corporate income is down, they say. This year, corporate taxes are expected to generate $311.5 million, a 28 percent decline from last year.

        The shortfall in tax revenues, including sales and income taxes, already has forced $533 million in state budget adjustments this year.

        At the Kentucky Chamber of Commerce's annual banquet in Lexington three months ago, Mr.. Patton pointed out that the share of General Fund revenues paid by corporation taxes has dropped alarmingly in the 12 years since the corporation income tax was increased by 1 percentage point to help pay for education reform.

        That share — then about 10 percent — is expected to fall to 4.7 percent this year.

        “I'm just pointing out the fact that corporate support for state government in Kentucky has dropped from what it was a decade ago, when many corporate leaders said, "Increase our taxes and give us better-educated people,'” Mr. Patton told the Courier-Journal. “This is a fact, and it's one of the reasons that our revenue is not growing.”

        But some corporate leaders say their taxes are based on the income their companies make, and incomes are down.

        “The corporation income tax is based on economic activity, which has been way down compared to 1998 or 1999,” said Dan Bork, vice president for tax with Lexmark International, a Lexington-based manufacturer of office printers and related products. “The only way for it to grow is for corporate profits to grow.”

        In 1989-90, the year before the tax increase, corporation taxes produced $354.8 million. Since the increase, the peak revenue year was 1997-98, with $446.4 million. Last year, the taxes generated $437.4 million.

        This year's estimate, $311.5 million, would leave corporate taxes 12 percent below the 1989-90 total — and 28 percent less than last year. Individual income tax revenues have increased 129 percent since 1990 — to an estimated $2.8 billion this year — and sales tax revenues have risen 108 percent. Individual income taxes represent the largest single source of General Fund revenues.

        Kentucky has two major taxes paid by corporations. The larger is a tax on net income, with a rate starting at 4 percent on income up to $25,000 and rising in steps to 8.25 percent on all income more than $250,000.

        The second is a corporation license tax. Patton describes it as more like a property tax. Every year, corporations pay $2.10 on each $1,000 of “capital employed in the business.”

        Tax experts in state government, business and academia offer many reasons for the poor performance of corporation taxes. Experts from business primarily blame the slow economy. But others, including Patton, say companies have become much more adept at finding ways to legally minimize their taxes, including deferring taxes from highly profitable years to leaner times and changing their formal structure to limit tax liability.

        But Chaz Lavelle, a Louisville tax attorney, said corporation tax revenues tell only part of the story. For many businesses that aren't formally incorporated, the state gets its money through personal income taxes paid by the owners for their share of the business income.

        “So you can't just look at the corporation tax revenue numbers and leap to the conclusion that corporations aren't paying their share,” Lavelle said. “Also, you've got to consider that businesses are paying lots of other taxes: sales taxes, property taxes, local taxes.”

        William Fox, a professor of economics at the University of Tennessee, analyzed Kentucky's tax system for the legislature over the past year. He noted that the corporation income tax has grown slower than any of the state's major revenue sources.

        One reason cited by Fox was the “growing emphasis on corporate tax planning.” That has led more corporations to take advantage of a provision in Kentucky law that allows related companies to report income either on a single combined return or on separate returns — much like the individual income tax option of separate or combined returns for married couples.


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