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AMC (Alternative Minimum Calculation) is a gross misjudgment

By Aaron Morris

Gov. Ernie Fletcher’s tax modernization plan – JOBS for Kentucky – is an ill-fated attempt to begin “stimulating economic investment and job growth ... by removing obstacles to innovation and investment in the Kentucky economy.”

One component of “JOBS” suggests lowering taxes on business profits while levying a new tax on gross receipts.

The amount of the tax would be determined by an “alternative minimum calculation" (AMC). Every business would pay a tax on either its profits or sales, whichever calculation is higher.

What would be the consequences of this new business tax?

·                    A gross receipts tax (GRT) would be charged to all businesses at a rate of .095 percent on every dollar of revenue it generates – even if the company fails to earn a profit. Because most new firms operate at a loss for several years, this tax impairs the ability of small businesses to create jobs and reinvest in the communities where they operate.

·                    When business activity declines, a GRT eats into business capital. During lean times, the inevitable effect of this tax would cause employers to lay off more workers and execute deeper cuts just to stay in business. It’s a “beat ‘em when they’re down” tax.

·                    Even while business is booming, a GRT would put Kentucky businesses at a severe disadvantage to our neighboring states. Should this onerous tax be enacted, businesses looking to relocate their operations could simply choose to go elsewhere.

·                    A GRT would result in business-to-business transactions being taxed in a pyramiding fashion at every step of the manufacturing process. Suppose “A” sells to “B” who sells to “C” who sells to “D,” with each adding value and paying a tax at each stage. As a result, “A’s” contribution is taxed four times, “B’s” is taxed three times, “C’s” twice and “D’s” just once. A GRT also offers an advantage to those businesses that can integrate more processes by “selling internally” compared to those that specialize in one discreet operation. This would reverse a global trend that emphasizes focusing resources where firms possess a competitive advantage while divesting those that do not.

·                    Firms will try to avoid paying a GRT. Nearly 40 percent of legally obligated companies fail to pay it in Los Angeles. Enacting such a despised tax in Kentucky would likely cause businesses that can move to relocate across the state’s borders to escape it. In a state like Kentucky where 53 percent of residents live in a county on the border, the possibility of this happening should send chills down any governor’s back.

A GRT will not accomplish the governor’s goal of finding a new taxing mechanism that guarantees a stable source of revenue. It is more likely to send existing businesses fleeing into our surrounding states.

(Photo provided by James C. Teresco.)

– Aaron Morris is a fiscal policy analyst for the Bluegrass Institute, Kentucky’s free-market think tank.

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