Despite strong profits for the nation’s biggest and most successful multistate corporations, a large share of Fortune 500 businesses — including some Kentucky-based companies — are paying taxes at a rate much lower than established tax rates, with some paying no taxes at all, according to a new report by the Institute on Taxation and Economic Policy (ITEP). As Kentucky considers a special session on tax reform later this year, ITEPs findings highlight a major problem with the state’s tax code: corporate tax breaks are a big reason we have too little revenue to meet basic investment needs in education, health and other budget areas.
The report describes holes in states’ corporate income taxes that result in an average effective tax rate for 240 Fortune 500 companies of just 2.9 percent, much lower than states’ statutory average top rate of 6.25 percent (Kentucky’s is 6 percent). Several “race to the bottom” strategies like proliferating costly tax incentives, allowing profits to be shifted out of state through various loopholes and accounting strategies, and states’ piggybacking on federal tax cuts are all reducing the effective tax rate at which these companies pay and eroding state revenues.
ITEP identifies two such corporations headquartered in Kentucky – Louisville-based Yum Brands and Humana. According to their analysis, Yum Brands’ effective tax rate over the last eight years (2008 – 2015) was just 1.7 percent of $3.3 billion in profits. In fact, YUM paid no state income taxes in 3 out of the 8 years studied despite $1.2 billion in profits over those 3 years. Similarly, with $15 billion in profits over the same span, Humana paid a total tax rate of just 3.2 percent.
Several other large companies that do business in Kentucky also paid little in corporate income taxes across all states in those years.
“The first step in any state’s corporate tax reform should be ensuring corporations are actually paying taxes,” said Meg Wiehe, director of state tax policy at ITEP. “At a time when public services that ordinary people rely on face inadequate funding, we shouldn’t be having a conversation about lowering taxes on profitable corporations, which only means the rest of us have to pay more. We should be talking about how to strengthen the corporate income tax to allow corporations to pay their fair share.”
The report describes several steps Kentucky could take to ensure profitable corporations chip in. Requiring multistate corporations to report income from subsidiaries on state tax returns (combined reporting), a “throwback rule” on income that is not taxed elsewhere, decoupling from federal domestic production tax credit and rolling back the way Kentucky now double counts sales in calculating corporate income taxes are examples of reforms that would improve revenue. Adopting the “single sales factor” for calculating taxes and cutting corporate income tax rates, on the other hand, are examples of harmful choices other states have made that Kentucky should avoid.
“With a special session looming, it’s important Kentucky evaluate corporate tax breaks which are often just an artificial sweeter for businesses to take actions they would have taken anyway,” Kenny Colston, communications director for the Kentucky Center for Economic Policy, said. “Providing more tax breaks and cutting corporate income taxes doesn’t help lure more companies. Instead it leaves families and smaller businesses picking up large corporations’ slack and reduces what we have to invest in the public services that support thriving communities and economies in the commonwealth.”
For more information, contact Kenny Colston at kcolston@kypolicy.org or 502-938-1817.
