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The AMC’s taxing scourge

By Brian Balfour

Despite the strong opposition to Kentucky’s alternative minimum calculation (AMC), our state’s leading policymakers are not making any kind of firm commitment to rid the commonwealth of this taxing scourge during the 2007 legislative session.

The most damaging aspect of the AMC is the fact that it forces businesses to pay taxes based on gross receipts … not profits. Even if a company loses money, it still must write a check to state bureaucrats in Frankfort.

When first implemented in 2005, proponents claimed the AMC was revenue neutral, and an effective way to close loopholes that allow businesses to avoid paying taxes. Neither of these claims is true.

First, the AMC has swelled state coffers much more than anticipated.

During the first six months after its passage, Kentucky’s corporate tax receipts were 79-percent higher than the previous year’s revenues, compared to the national average of 22 percent.

Some in the Fletcher administration claim that these revenue increases are the result of increased business activity. But does anyone honestly believe our state’s economy grew by almost four times the national average?

It doesn’t take a Nobel prize-winning economist to figure out that Frankfort’s claustrophobic tax policy is helping fill government coffers but hindering the creation of new businesses and rewarding jobs.        

Additional tax-revenue information from state budget director Brad Cowgill’s office also offers cause for further concern about the negative impact the AMC appears to be having on the commonwealth’s economy.

According to Cowgill’s office, the state experienced a 384-percent increase in corporate income-tax revenue between fiscal years 2001 and 2005.

Between fiscal years 2004 – the year before the AMC was implemented – and 2005, the first year of its collection, corporate-tax revenues increased a whopping 109 percent. On the other hand, sales-and-use tax revenues, which offer genuine clues about the state-economy’s vitality, rose only 6 percent between fiscal years 2004 and 2005.

Budget officials claim there’s no way of knowing exactly how much of the increase in tax revenue collected was determined specifically by the AMC. Still, it doesn’t take a Nobel prize-winning economist to figure out that Frankfort’s claustrophobic tax policy is helping fill government coffers but hindering the creation of new businesses and rewarding jobs.

Second, by trying to capture more tax dollars from Kentucky businesses, the AMC creates an incentive for companies to seek out-of-state suppliers.

Such a practice can be especially harmful to a state like Kentucky with nearly half its counties bordering other states.

In an interview with the Tax Foundation’s Scott Hodge, John Mikesell, professor of public finance and policy analysis at Indiana University, explained:

Because the tax applies at every transfer in the production and distribution stage, you’ve given business in your state a very clear incentive to buy as much of their inputs – their raw materials, their production machinery, and so on – from out of state suppliers, because most out of state suppliers don’t have to worry about the gross receipts tax being embedded in the price they charge.

The AMC is particularly bad for Kentucky’s unique economy. Hardest hit by gross-receipts taxes are businesses in highly competitive, low-profit margin sectors – including the distribution, warehousing and logistics industries like UPS, one of our state’s largest employers.

It might help even the state’s biggest-spending politicians decide to rightly renege on their original support for the AMC if they consider that it could threaten the economic success being enjoyed by Northern Kentucky – thanks to companies like Gap Inc. – which employs 1,151 people in the region. Failing to get rid of this tax could result in causing the sustained growth the Northern Kentucky region has experienced in recent years to falter.

One needs to look no further than Michigan, which implemented a similar gross-receipts tax in 1975, to see a perfect example of the destructive effects of such a tariff. Between 1980 and 2004, Michigan’s growth rate of business establishments was well below the national average; its unemployment rate was fourth-highest in the nation. Lawmakers there finally recognized this tax for the job-killer that it is and voted to repeal it by the end of 2007, a year before it was scheduled to sunset.

The only way for Kentucky to climb out of its economic rut is through growth. The AMC, with its punitive gross-receipts tax, will only discourage businesses expansion and job creation.

State lawmakers have a golden opportunity to admit their mistake and take a bold step towards creating a much more competitive – and fair – business climate.

– Brian Balfour is a policy analyst for the Bluegrass Institute.

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

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