Kentucky House Enacts Gross Receipts Tax Relief for Small Businesses

June 28, 2006

On Monday, the Kentucky House of Representatives passed a bill that would exempt businesses from the state’s alternative gross receipts tax if the business has less than $3 million in gross receipts. The bill would also reduce the state’s corporate income tax rate to 6 percent from the current rate of 7 percent.

As a result of a tax plan enacted last year, Kentucky has an odd corporate tax system (see table here for some basic facts). Companies have to calculate their liability under both a corporate income tax and an alternative gross receipts tax–and pay the higher. A minimum assessment of $175 also applies.

The move by the Kentucky House comes as a result of complaints from small businesses about the unfairness of the alternative gross receipts tax. The complaints are typical based on what we know about gross receipts taxes: businesses have to pay regardless of profitability, and businesses with low margins are more severely impacted than businesses with high margins, compared to a net income system.

There is no doubt that another major complaint is the incredible revenue the new Kentucky corporate system is generating. According to reports, Kentucky’s corporate income tax revenues are up 150 percent this year ($758 million) versus last year ($302 million).

Based on the history of gross receipts taxes (or their equivalent) in other states, this move is not suprising. No state that has enacted a gross receipts tax has ever lived with it or failed to provide small business relief up front. In that respect, it will be interesting to see if neighboring Ohio–which has a stand-alone gross receipts tax with an exemption of $1 million–will now move to increase its exemption.

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