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Kentucky can’t tax its way to prosperity

By Christopher J. Derry

Predictably, Gov. Ernie Fletcher’s tax-modernization act that passed last year is now generating additional piles of cash. His deputies sing in unison, proclaiming the additional revenues indicate the state’s economy is picking up steam.

However, a recent Lexington Herald-Leader headline “Law taxes business more than expected” suggests otherwise. The article reports the governor’s tax plan is generating $157 million more than his “revenue-neutral” tax package predicted last year the state would receive in 2006.

A key element of Gov. Ernie Fletcher’s 2005 tax package was a new gross-receipts tax. Of all the potential taxes to hang one’s political future upon, a gross-receipts tax is probably the most heinous as it applies a tax on the revenues – not profits – generated by a business.

Since annual profits are never guaranteed, where does a business owner get the money to pay a tax if he has no profit left over?

To stay in business, he must somehow find excess cash under his mattress, in a can buried out back, on his knees in front of his wealthy mother-in-law, from the dustbins of his savings account or from a bank that will still loan him money. He wonders why Kentucky legislators hate him so much.

Some may wonder who would complain about raising this new gross-receipts tax by .005 percent – a nickel for every thousand dollars of sales.

Ask convenience-store owners who sell thousands of gallons of gasoline every month to earn a small profit. Talk to supermarket owners who move massive amounts of groceries and depend on thin profit margins to keep their doors open. Then listen to car dealers explain how they trade automobiles furiously from people to dealers to auctions, trying to earn a small profit. If moving money from one hand to another was all it took to make somebody rich, bank tellers would all drive Mercedes!

As voters are many and businesses so few, it will not take much political courage to explain a small increase to voters in future years. This explains the core reason this tax was initiated. It is a political diamond mine for spend-happy politicians whose grades in mathematics never impressed their teachers.

Tax receipts are streaming into Kentucky’s coffers at high rates from businesspeople in the midst of an anxious dilemma. They try to look forward in time as far as possible when making decisions today. If a business owner expects his expenses could again exceed sales, he worries about where he will get the money to pay Kentucky’s gross-receipts tax next year.

More than 50 percent of Kentucky’s population lives in a border county. Rising taxes here makes the grass look a lot greener across state lines. Tennessee has no personal income tax. Indiana repealed its gross-receipts tax in 2003. Ohio’s incumbent politicians are scrambling to reduce the Buckeye State’s business-tax burden because jobs and retirees are leaving like rats diving off a sinking ship. Aren’t Kentuckians sick and tired of repeating the mantra, “Thank God for West Virginia?”

Various reform proposals are being offered, including a plan backed by small-business advocates that would minimize the bite of a gross-receipts tax on smaller companies by increasing the burden on bigger firms.

One of the changes currently being considered would freeze the corporate-income tax at 7 percent, effectively repealing one of the bright spots in Fletcher’s tax-reform measure approved last year. Such a freeze on scheduled tax cuts amounts to a very real corporate tax increase by legislators eager to grab some of the cash they missed the last time around.

This behavior is predictable. A tax on sales causes every businessperson to scramble. Because profits are so elusive, successfully dodging taxes can yield the only profit a business might generate in a year. As a result, politicians effectively turn groups of business owners against one another with each lobbying to save his own hide.

Legislators should recognize the insidious nature of gross-receipts taxes now while entrepreneurs are still stewing over what to do. If elected officials wait much longer, those businesses that can operate from outside Kentucky will do just that. And once they are gone, Kentucky loses even more.

The exiting entrepreneur no longer must pay Kentucky its income tax, corporate tax, inheritance and estate tax, motor vehicle-usage tax, water tax, property tax, sales tax, gasoline tax, cigarette tax or any other tax Frankfort’s politicians decide to invoke in the future.

Cease the self-delusion. This taxing madness must stop. Taxes are tariffs on economic activity. If the state raises them, economic activity declines.

Reducing our onerous tax burden on businesses is the first step to reviving real job creation in Kentucky. Legislators should take the first step in that direction by abolishing the gross-receipts tax – now.

– Christopher J. Derry is president of the Bluegrass Institute, Kentucky’s free-market think tank.

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