The Louisville-based parent of such companies as Kentucky Fried Chicken and Taco Bell paid no net corporate income taxes to states over the past three years, even as it generated more than a billion dollars in profits for shareholders, according to a new report.
Yum Brands is one of 68 companies nationwide that paid no state corporate income tax in at least one of the past three years, according to "Corporate Tax Dodging in the Fifty States, 2008-2010" a report released Wednesday by economic justice advocacy groups.
Twenty of those companies averaged a tax rate of zero or less during the 2008-10 period, including Yum Brands, according to the report by the Institute on Taxation and Economic Policy and Citizens for Tax Justice.
"The report's findings are troubling," said Jason Bailey, director of the Kentucky Center for Economic Policy, which also helped produce the report. "At a time of record corporate profits, many large corporations are avoiding paying their fair share for the public services from which they benefit. By deepening Kentucky's budget woes, corporate tax avoidance directly harms our ability to provide quality education, improve health and build a foundation for a strong economy."
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Yum Brands officials did not return calls seeking comment on Wednesday. According to the report, Yum paid a state income tax rate of negative 2 percent in 2008, 0.3 percent in 2009 and 0.9 percent in 2010, for a three year rate of negative 0.4 percent.
Bailey said state corporate income taxes are a small percentage of a company's costs, but are very important to Kentucky's budget. Last fiscal year, about $300 million of the state's $8.76 billion in General Fund receipts came from corporate income taxes.
The report also showed that three other Fortune 500 companies in Kentucky — Ashland, Humana and Kindred Healthcare — paid a three-year state income tax rate of less than 4 percent.
The national average for a state corporate tax rate is 6.2 percent, according to the report. Of the 265 Fortune 500 companies studied in the report, the average state corporate income tax rate paid was 3 percent.
Nationally, the reasons for declining state corporate tax rates are varied and complex, including lower federal tax rates, economic development incentives that grant tax breaks, and the ability of multi-state corporations to legally shift profits from one state to another.
The advocacy groups examined filings with the U.S. Securities and Exchange Commission to ascertain tax rates, although it could not discern exactly what each corporation did to lower its tax rate.
Bailey said there are several things Kentucky's legislature could do to increase its corporate income tax revenue, including:
■ Require combined reporting, under which a parent company and its subsidiaries are treated as a single corporation for state tax purposes. Combined reporting eliminates most of the advantage of shifting profits into Delaware, Nevada and other low- or no-tax states. Twenty-three states have put in place combined reporting, and Kentucky could gain $27 million to $54 million in additional revenue each year if it implemented combined reporting, according to a Legislative Research Commission analysis.
■ Uncouple Kentucky's tax code from a federal tax loophole that provides a tax break for business activities in the United States. Kentucky partially allows the deduction for state taxes despite the fact that it provides no incentive for business investment or location in Kentucky as opposed to another state.
■ Enact a throwback rule, which prevents taxable income of multi-state corporations from falling between the cracks by assigning income that is not taxable in any state to the home state where the goods are produced. Twenty-five other states have such a rule.
■ Create a provision for corporate tax incentive programs that would require a periodic review of their effectiveness by a legislative committee. The programs would expire unless renewed by the legislature.
In Kentucky, the state will grant $292 million in corporate income tax breaks during 2012, according to the Office of the State Budget Director, but the long-term effectiveness of many of those tax exemptions has never been studied. By 2014, the cost is expected to increase to $310 million.
However, any proposed changes to Kentucky's tax policy face an uphill battle in Frankfort. Gov. Steve Beshear has said repeatedly that he does not support making major changes to Kentucky's tax code during a down economy.
Senate President David Williams, R-Burkesville, said during his recent gubernatorial race with Beshear that he favored eliminating the corporate income tax altogether and shifting to more dependence on the sales tax.
Rep. Jim Wayne, D-Louisville, files a bill every year that would overhaul the state tax code by lowering personal income taxes and taxing more services for the first time.
"It's a serious concern," Wayne said of Wednesday's report. "These companies need to pull their weight, otherwise it's not fair to the citizens of this state. We've given them many incentives. All corporations should pay their fair share."