Herald-Leader Editorial

Get corporations to pay more taxes

Study: Ky. firms pay little to states

December 13, 2011 

Businesses and individual Kentuckians who paid state income taxes the past three years may be left with thoughts inappropriate to this charitable season as a result of the news that Yum Brands paid little, if any, state taxes during the same period.

The Louisville-based corporate parent of Kentucky Fried Chicken, Taco Bell, Pizza Hut and other brands paid a state income tax rate of negative 2 percent in 2008, 0.3 percent in 2009 and 0.9 percent in 2010, resulting in a three-year rate of negative 0.4 percent. A negative rate usually brings a tax refund from an earlier year.

Unfortunately, we don't know what it paid in Kentucky because Securities and Exchange Commission reporting doesn't require a state-by-state breakdown and Kentucky doesn't publish information about taxes paid by corporations.

But it's probably safe to assume that it's below the 6-percent rate that corporations with more than $100,000 in taxable income and individuals with moderate incomes are assessed.

None of the publicly held, Kentucky-based companies examined in "Corporate Tax Dodging in the Fifty States, 2008-2010," a report released last week by economic justice advocacy groups, came anywhere near the 6 percent rate in their three-year average.

Ashland Inc. came in at 1 percent, Humana at 3.4 percent and Kindred Healthcare at 3.6 percent. Again, these numbers represent taxes paid in all states, so we don't know the contribution to Kentucky.

It would be easy to write a screed about the disconnect between highly paid executives (Yum CEO David C. Novak's compensation, not including perks such as use of the company jet, amounted to $51.746 million those three years), but that is really a different issue.

Novak, and his fellows in other companies, are doing what they're paid to do, maximizing profit by operating their companies as effectively and efficiently as they can, which includes minimizing taxes paid. Their obligation is to shareholders not to states, citizens or taxpayers — despite Yum's self-characterization as "a company with a huge heart."

The real problem here is with the people who are obligated to look out for the best interest of Kentucky's citizens and taxpayers: the governor and members of the legislature. They, after all, create the tax law that allows this to happen. The report offered some suggestions:

■ Let's start with transparency. Requiring Yum and the others to disclose what they pay in Kentucky taxes would be a step forward. This isn't just about public shaming. Without this information, it is impossible to understand the impact of tax changes on the companies and state revenue.

■ Another fix is what's called combined reporting. Parent companies that do business in multiple states through subsidiaries can shift profits to the lowest-tax state. With combined reporting they are treated as a single corporation for state tax purposes and so can't play that game. The Legislative Research Commission has calculated that Kentucky could gain $27 million to $54 million in revenue each year if it had combined reporting as 23 states do.

■ A related initiative is a "throwback rule," which provides that revenue that isn't captured under any state's code is thrown back to the home state.

■ Finally, Kentucky must continue to examine closely all the tax giveaways it affords corporations, including automatically adopting those passed at the federal level. The state budget director's office calculates that next year Kentucky will grant $292 million in corporate income tax breaks, which are expected to grow to $310 million by 2014. The long-term effectiveness of many of those tax exemptions has never been studied.

On this last point, many rely on anecdotal evidence about employment and investment, saying it proves these incentives are good for Kentucky.

But, consider this: Individual taxpayers and smaller businesses that can't afford a team of accountants to navigate tax policy also make serious contributions to our state's welfare by hiring people, raising and educating children, maintaining their property, paying their bills, volunteering and otherwise contributing to their communities.

Certainly they do as much good for Kentucky as this handful of huge companies. And for that, they deserve a tax system that treats them fairly.

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