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A taxing ‘alternative’ we can live without

By Aaron L. Morris

Gov. Ernie Fletcher is poised to call upon legislators to address Kentucky’s increasingly complex and burdensome business taxing system.

Why must Kentucky’s new tax code again be revisited? Three words are wreaking havoc among business people since Frankfort etched them into its tax code: “Alternative Minimum Calculation” (AMC).

This AMC, passed during the 2005 legislative session, was an attempt to “capture” additional tax receipts from companies – whether they earned a profit or not.

Until this new taxing scheme hatched, Kentucky businesses paid income taxes on their profits, not revenues. Businesses investing in infrastructure and hiring new employees were not taxed until their total sales or revenues exceeded their total costs. As if the AMC were a bakery, it invites the legislature to enjoy the bread before it is baked!

Though proponents of this tax suggest that business is the prime target of the AMC, it’s tough to find anyone who benefits from such a taxing regime.

The incentive to start a new business erodes. A car dealer must first buy cars before he can sell them. If after selling them he has nothing left over, where do these new taxes come from? Do legislators think nickels are the byproduct of combustion?

Worried about not having enough money to pay taxes causes entrepreneurs not to hire new employees or expand their operations. If businesses won’t hire Kentuckians, who will?

More than 100,000 Kentuckians are unemployed today. The disincentives harbored by the AMC deny them the opportunities new jobs could bring.

When entrepreneurs search among states for a friendly location in today’s competitive business environment, Kentucky’s AMC effectively takes it off the map.

Tom Underwood, director of Kentucky’s chapter of the National Federation of Independent Businesses (NFIB) reinforces this notion.

“The Alternative Minimum Tax discourages entrepreneurship because it asks would-be small-business owners to put their whole life on the line knowing that even if they don't turn a profit, they will still owe taxes to the Commonwealth of Kentucky,” Underwood wrote on NFIB.com. “This will make the difference between whether people start small businesses, or are able to stay in small businesses.”

If damaging the prospects for business creation is not a sufficient reason to dislodge this tax, the dire consequences of it should scare the pants off legislators. Tax receipts levied on some businesses by the AMC may simply offset declining ones caused when marginally profitable businesses close their doors to escape this tax.

Business people who foresee declining profits cut costs to preserve them. Likewise, entrepreneurs make major investments in labor and capital during good economic times as long as they can see profits around the corner.

The AMC ruins these natural incentives. Increased business taxation has the potential to benefit schools and provide care for elderly Kentuckians – but only if it arrives in Frankfort’s coffers. Could April’s 6.6-percent decline in tax receipts – following 26 consecutive months of growth – be the signal that Frankfort’s business taxing scheme has cut business to the bone?

Instead, lawmakers should realize that employer-friendly tax policies will generate the tax receipts that benefit employees, pay teachers, compensate public employees, build roads and assist the sick and elderly.

Reducing the tax bite on business has the potential to curtail the commonwealth’s chronic unemployment rate which, at 6.1 percent, is significantly higher than the national rate of 4.7 percent. Until entrepreneurs can put more of our fellow Kentuckians back to work, other funding priorities will remain all but insurmountable.

As legislators maneuver and debate, we predict the ya-ya of “fixing” the AMC. They will tweak this or that number and proclaim a compromise that is not “as bad.” Considering the horrendous consequences of maintaining the AMC, fixing it won’t work.

This shameless money grab from businesses large and small is beyond repair. Just like putting a new coat of paint on an old clunker doesn’t turn it into a classic car – putting a muffler on the AMC will not create a more prosperous Kentucky.

Instead, legislators should conduct a short, focused session with a single purpose: Abolish the AMC.

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

The Bluegrass Institute is an independent research and educational institution offering free-market solutions to Kentucky's most pressing problems.

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