Corporate Tax Rates

Let’s take a look at Kentucky Corporate Income Tax.

Every corporation pays taxes. Corporate taxes can be computed three ways.

First is using net income with the following rates:
First $50,000………………..4 percent
Next $50,000……….……….5 percent
Next $100,000……….……..7 percent

Second, the alternate minimum calculation which is the lesser of 9.5 cents per $100 of the corporations gross receipts or 75 cents per $100 of the corporations gross profits.

Or third $175, this is usually paid by corporations with no profit. In other words if you are losing money you still owe the Commonwealth at least $175.

This is pretty small business friendly; the first $100,000 is taxed at an average rate of 4.5 percent. Not bad since most of the businesses in Kentucky fall into the small business category.

So when we talk about abolishing the corporate tax, who really benefits?

I’d say the top five winners would be Humana, Brown Forman, Lexmark, Ashland and Yum Brands.

Net Income for these corporations:

Net Income for Yum Brands in 2009………$1,083,000,000.00

Humana net income was $393 million in the quarter ended Sept. 30.


Brown Forman in 2010 second-quarter profit rose 4.5% to $154 million.

Lexmark in the second quarter of 2010 posted a net income of $85.1 million
Ashland so far in 2010 has net income of $332 million.

So let’s do a little math, we’ll round the numbers to make it a little easier, for an annual net income for just these 5 companies. We’re looking at roughly $4 billion dollars in net profit. Now if they actually paid 7 percent to Kentucky that would be about $280 million to the state treasury.

According to Office of the State Budget Director, the Corporate Income tax collected in the first quarter of fiscal year 2011 was $69.9 million. So if that holds for the next 3 quarters we are looking at about $280 million in revenue from corporate taxes.

That’s from all the corporations in Kentucky not just the big five.

So here’s a proposal, remember the dollar amounts are net profit and that the rates would need to be reviewed on a regular basis.

Eliminate all corporate income tax on the first $50,000 in net profit. This helps small businesses and start-ups.

Reduce the rate to 3 percent on the next $50,000 in net profit.

From $100,000 to $250,000 reduce the rate to 5%.

Now every business with less than a quarter million in net profit got a major tax break.

From $250,000 to $1 million set the rate at 7 percent, no change for these companies.

Only after a million dollars in net profit do the rates increase.

From $1 million to $250 million set the rate at 10 percent.

Over $250 million set the rate at 12 percent.

And one other thing, no deductions, no exclusions, no exemptions, no extra breaks period. Just pay the rate.

This gives over 90 percent of the businesses in Kentucky a tax break, spurs employment and increases revenue for the Commonwealth.

Friend of Coal

I received in an email from David Adams, campaign manager for Phil Moffett with the following quote:

"My tax plan would stop sending coal severance funds to Frankfort to get lost in the bureaucracy," Moffett said. "That money belongs in the local communities for legitimate infrastructure needs. And getting rid of income taxes makes businesses more profitable, so they hire more people. Eastern Kentucky doesn't need more government. Eastern Kentucky needs more jobs."

So let us talk about the coal severance tax. Phil Moffett is right too much of the funds go to get lost in the bureaucracy and belong in the community. But I’m afraid that his plan of leaving the money in the hands of the coal companies and expecting then to do the right thing is historically ignorant and naïve at best.

Kentuckians for the Commonwealth (KFTC) has a very good short brief on the Coal Severance Tax and where it goes. They even draw us a picture of the cash flow and point out where some of the money.

From the KFTC website:

The Legislature has gone so far as to give coal severance funds back to the coal industry, such as requiring counties to spend severance funds to maintain “coal-haul roads”, the same roads used and destroyed by the coal companies. In addition, Kentucky’s Worker’s Compensation Fund, over-burdened by mining caused claims and underpayment by coal companies, is annually propped up by a $19 million dollar “off the top” transfer of severance funds.

Kentucky currently subsidizes the coal industry with over $97.4 million in tax credits, tax expenditures or direct support, including $26.7 million that comes from the coal severance fund. To add insult to the injury of local coal dependent communities, on August 30, 2007, Kentucky’s Governor Ernie Fletcher signed into law House Bill 1 of the 2007 Second Extraordinary Legislative Session. In the name of economic development, HB 1 uses coal severance funds to subsidize a new wave of coal related industry – the conversion of coal to a gaseous or liquid fuel.

Dollar wise, most of the HB1 incentives would be rebates of up to 80% of paid coal severance taxes that would come off the top of the severance fund before any calculations are made to determine how much is returned to the counties.

So I think Phil is right "That money belongs in the local communities for legitimate infrastructure needs” but not in the pockets of coal companies.

The coal companies should pay their own business expenses maintaining coal haul roads and pay their fair share of Workers Comp Taxes. I’m also sure that the Tea Party candidate would agree that we should get rid of the $97.4 million dollars in tax credits to the coal industry.

I think we should keep the coal severance tax be kept and live up to the original promise of returning 50 percent of the money to the counties for “legitimate infrastructure needs”.