As Kentucky and other states struggle with tough budget decisions about essential public services, profitable Fortune 500 companies including Kentucky-based Yum Brands and Humana pay little to nothing in state corporate income taxes around the country, according to a new study by the Institute on Taxation and Economic Policy and Citizens for Tax Justice.
The study, 90 Reasons We Need State Corporate Tax Reform: State Corporate Tax Avoidance in the Fortune 500, 2008 to 2012, examines 269 companies that were profitable every year in the sample. 90 of the companies paid no net state income tax in at least one year despite telling shareholders they made $171 billion collectively in pretax U. S. profits those years. 38 companies avoided taxes in two or more years, and many of the others paid taxes at a rate substantially lower than the statutory rate.
Kentucky-based Yum Brands, for example, made $1.8 billion in profits but avoided paying state corporate income taxes in two of the study’s five years, while their average tax rate over the period was only 1.1 percent. Humana made $8.5 billion in profits but paid only 3.1 percent in state income taxes over those five years. In contrast, Kentucky’s top corporate income tax rate is 6 percent, and the average rate for states across the country is 6.25 percent.
The study notes that companies commonly take advantage of copious corporate tax loopholes and use lavish tax incentives and accounting methods to avoid paying adequate corporate income taxes, though states can take actions to fix many of those problems. Corporate tax revenue in Kentucky has fallen from 11.6 percent of General Fund collections in 1989 to 6.9 percent in 2013.
Other findings include:
- 10 companies, including American Electric Power, Merck and Boeing paid no net state income tax over the five-year period covered by the study.
- The companies examined collectively avoided paying $73.1 billion in state corporate income tax.
- The 269 companies paid an average corporate income tax rate of just 3.06 percent.
The report comes at a time when some Kentucky officials promote creating more corporate tax cuts, including single sales factor apportionment, and while lawmakers consider a budget that includes the 14th round of cuts to many valuable public services.
But profitable corporations rely on our state’s schools, roads and courts, and should be held accountable for their fair share of the cost of public investments. Otherwise, middle- and low-income Kentuckians and small businesses are left subsidizing the profits of these corporations. There are a number of reforms Kentucky could make to close loopholes and expand the base, making our state tax system fairer and more adequate.