Back to Tax Equity in KentuckyBy Lawrence K. Lynch
From Financing State and Local Government
p. 57-72, published 2001
This paper discusses rationales for business taxation, summarizes the issue of business tax incidence, reviews earlier studies of Kentucky’s relative business tax burden, and compares Kentucky’s business tax burdens with those in neighboring states. One recent study found that Kentucky’s business tax burden was average while another found it to be relatively high. This analysis finds Kentucky’s business taxes comparable with those in neighboring states, but personal taxes are relatively high. Kentucky is a poor state that must levy relatively high taxes to provide an average level of public services, but the high tax burden is borne disproportionately by individual taxpayers, not businesses.
Is Kentucky’s tax structure competitive, or do we discourage capital investment in Kentucky with high business taxes? Two recent studies of business tax burdens came to opposite conclusions: a Barents Group analysis found that Kentucky has average business tax burdens and higher-than-average individual tax burdens, but a joint study by the University of Kentucky Center for Business and Economic Research and the University of Louisville College of Business and Public Administration (UK-UL) found that Kentucky has above-average business tax burdens.(41)
At first glance, it is difficult to see how anyone could argue that Kentucky overtaxes businesses. Figure 19 shows that, over the past decade, Kentucky’s two major state business taxes––the corporation income and license taxes––have produced revenue growth of just 20 percent. Meanwhile, total General Fund revenue growth matched total personal income growth of about 80 percent.
Figure 19: Indices of Growth in Income and Revenue, FY 1990-2001
Figure 19, though, does not include every state tax that businesses pay, and omits local taxes altogether. And even if Kentucky’s business tax burden has fallen over time, perhaps the burdens in other states have declined more. This chapter will revisit the issue of business taxes, beginning with a discussion of the kinds of business taxes, the reasons for business taxes, and the incidence of business taxes. Then we will review the Barents and UK-UL studies as well as some earlier research. Finally, we will provide new estimates of business tax burdens in Kentucky and surrounding states.
Taxes imposed on business by state and local governments include levies on the right to do business (e.g., franchise taxes), on the purchase of inputs (e.g., sales taxes, unemployment insurance taxes), on the ownership or transfer of assets (e.g., business property taxes, corporation license taxes), on net income (e.g., the corporation income tax), on the depletion of nonrenewable resources (e.g., severance taxes), and levies related to external costs thought to be imposed by businesses (e.g., excise taxes on the sale of liquor).(42)
The justifications for business taxes include ability to pay, tax exporting, political expediency, and the benefits principle(43)—the same justifications that support personal taxes. But business entities themselves do not bear the burden of taxes. Although the initial impact of a business tax may be on the business entity, the ultimate burden (the incidence) depends upon the ability of the business to shift the tax—either to consumers via higher prices or to input suppliers via lower input costs. The owners of the business pay the portion of business taxes that cannot be shifted. Thus, every business tax is ultimately borne by individuals, partly as consumers paying higher prices and partly as owners of inputs (land, labor, or capital) receiving lower incomes.
Economic research has found the following:
Oakland and Testa argue that “… general business taxation should be structured so as to recover the costs of public services rendered to the business community.”(47) Individuals should bear the burden of taxes that pay for the services that benefit people, the argument continues. If business taxes are used to subsidize general public services, citizens will demand more services than they are willing to pay for, and the public sector will grow too large. Moreover, attempts to export taxes can be effective only in situations where a jurisdiction “… has some competitive advantage due to superior or unique natural resources,”(48) such as Kentucky coal or Florida beaches. Finally, high business taxes may lead to capital flight—reduced business investment in the state.
Business taxes that conform to the benefits principle would be efficient, Oakland and Testa believe, because the prices of goods and services produced in each state would reflect their full costs of production. In addition, benefits-based taxes would be neutral with respect to capital mobility.
Current levels of business taxation have been found to be higher than needed to offset the costs of public services. Oakland and Testa estimated that, for the nation in 1992, state and local business taxes were 71 percent higher than the public expenditures that benefited business.(49) An analysis for Kentucky found that business taxes in 1994 exceeded business public expenditures by 88 percent.(50)
The argument that business taxes should be based solely on the benefit principle is not completely convincing. To the extent that owners of capital ultimately pay business taxes, such taxes are progressive, and therefore arguably fairer. And poor states like Kentucky may well export much of the burden of business taxes. Kentucky’s median household income is below the national average and our poverty rate is above average.(51) And family net worth is much lower in the U.S. South than in the Northeast or Midwest.(52) Thus, many stockholders in the multistate corporations that operate in Kentucky may well live in other states and yet indirectly pay Kentucky taxes.
Stockholders, however, are unlikely to keep their capital in a place or in an industry where its after-tax return is low. Because capital is mobile, it will move to the location where it will earn the highest return. “If a tax on capital in a single state (or industry) reduces the after-tax rate of return, investors will move their capital to lower-tax locations (or industries).”(53) Thus, at equilibrium, the net after-tax rate of return on capital should be equal in all locations and all industries.
This would seem to imply that if a state were to reduce business taxes it would upset the existing equilibrium and attract business investment. But state and local taxes represent only a very small portion of business costs and, for this reason, may have little effect on business location.(54) Labor, energy, and transportation costs matter most.
Further, because business location decisions are at least influenced by managers who must move their residences to the selected location, personal state and local taxes may be equal in importance to business taxes. But why focus on taxes? Taxes are the costs of public services; if services are satisfactory, the tax costs will be accepted. Indeed, the states with the highest per capita incomes are also those with the highest taxes—and probably the highest quality public services.(55)
Many studies of state and local tax burdens define “burden” as tax revenue divided by some measure of taxpaying capacity—which may or may not be the actual tax base. The effects of tax shifting are often ignored in these studies. Over the past 20 years, at least four analyses of Kentucky’s tax burdens—business, household, or both—have been conducted. Here, we consider the findings—and the flaws—of these analyses.
A 1983 study estimated 1977 business tax burdens in each of the 48 continental states. The measure of business taxes combined revenue from corporate income taxes, unemployment insurance taxes, severance taxes, license taxes, and portions of property taxes, insurance premium taxes, utility gross receipts taxes, and stock transfer taxes. No attempt was made to estimate business shares of general sales taxes.(56) The study used an estimate of business income in each state as the measure of taxpaying capacity. The Wheaton study found that Kentucky ranked 43rd among the 48 contiguous states in business tax burden; only two of our neighboring states (Indiana and Missouri) ranked lower.(57)
The Advisory Commission on Intergovernmental Relations (ACIR), a bipartisan commission created by Congress in 1959, developed standard measures of state and local tax capacity and tax effort, and reported their findings annually until the early 1990s. As defined by the ACIR, a state’s “tax capacity” measured the wealth of a state (i.e., its ability to generate tax revenue); “tax effort” measured the extent to which a state utilized its capacity (i.e., its willingness to levy state and local taxes).
The ACIR’s Representative Tax System (RTS) began with the computation, for each state, of the tax base for each of 27 widely used taxes. For example, a state’s tax base for the sales tax was retail sales in the state; the tax base for the corporation income tax was total corporate profits in the state.
Next, for each tax, the national average state and local tax rate was multiplied by each state’s tax base. The result was a state’s “tax capacity”—the amount of revenue the state would produce if it applied the national average rate to its own base. A tax capacity index was then computed by dividing a state’s per capita tax capacity by the national average per capita capacity. A state with a sales tax capacity of 90, for example, had 90 percent of the national average retail sales per capita.
A state’s “tax effort,” for any tax, was the percentage of its tax capacity that it actually utilized: per capita tax revenue divided by per capita capacity. By aggregating each state’s tax capacity and tax effort over all 27 taxes in the RTS, the ACIR computed overall state indices for tax capacity and tax effort.
In 1991, just after Kentucky substantially increased taxes to support education reform, Kentucky’s total tax capacity index was 83 and its tax effort index was 100.(58) Only 12 states, however, had a tax effort index higher than 100, which led the Kentucky Economic Development Corporation (KEDC) to declare “… Kentucky’s tax burden has increased to the point that we are at a competitive disadvantage with respect to economic development.”(59)
Although the ACIR did not allocate tax revenue into business and household categories, the KEDC found that Kentucky’s tax efforts on corporation income and net worth taxes were well above average. Our personal income tax effort was even higher; however, our property tax effort was significantly below average, and our sales tax effort was slightly below average.(60) Since business taxes include portions of the property and sales taxes, where Kentucky’s effort was below average, as well as the corporation income tax, where Kentucky’s effort was high, the ACIR findings were inconclusive with respect to the business vs. household tax burdens.
The Wheaton study found that Kentucky had a low business tax burden in 1977; the ACIR found that Kentucky’s overall tax effort, and perhaps our business tax effort, was high in 1991. We now turn to two recent studies of Kentucky’s current business tax burdens, studies that come to very different conclusions.
This 1999 study estimated both business and household tax burdens. To determine business tax burdens, the Barents Group created hypothetical “representative firms” in 19 industries. Then they calculated revenue, costs, assets, and liabilities for each firm based upon national averages and located one firm from each industry in Kentucky and in each of 14 comparison states.(61) The model then simulated a hypothetical $100 million expansion investment for each firm and calculated the marginal effective tax rate (the difference between the pre-tax and after-tax rates of return) for each industry in each state.
Pre-tax revenue and costs were based upon “… the actual experience of firms of a certain size in each industry covered by the study.” Data were obtained from the Internal Revenue Service’s Corporation Source Book.(62)
The business taxes examined in the study were the corporation income tax, the corporate franchise tax, the property tax, and the sales and use tax on business purchases.(63) Business taxes were reduced by generally available tax credits, but not by credits redeemable only under specialized conditions. In Kentucky, credits under the Kentucky Industrial Development Act (KIDA) and the Kentucky Jobs Development Act (KJDA) qualified, but credits under two other programs did not.(64) Because there is considerable variation in local property tax rates, the representative firms were placed in cities that had property tax rates close to the statewide average.
“Generally, Kentucky’s state and local tax system performed in the middle of the comparison states in terms of overall business tax competitiveness across all of the study industries.”(65) Property and sales taxes are relatively low in Kentucky, low enough to offset a relatively high corporation income tax.
Household Tax Burdens. Barents compared household tax burdens by creating ten hypothetical households of different sizes and income levels, and placing them in Kentucky and each of the 14 comparison states. The state and local taxes calculated for each household were personal income taxes; property taxes; general sales taxes; gross receipts on utility usage; and excise taxes on motor fuel, alcoholic beverages, and tobacco product consumption.(66) (Household expenditure patterns were derived from the Census Bureau’s Survey of Consumer Expenditures.)
Kentucky households ranked relatively high in household tax burdens (3rd or 4th highest for all households except the two poverty-level examples, which ranked 6th and 7th). Kentucky’s substantial state and local income taxes were the main reasons for our high household tax burden.(67)
Critique. The main criticism of the Barents study is that everything except taxes was held constant. All other costs––labor, energy, transportation––were assumed to be equal for each industry in each state. The purpose, of course, was to isolate the effects of state and local taxes. But other cost differences could, in principle, offset differences in taxation. For example, suppose the $100 million investment in Trucking and Warehousing (the highest-tax industry) produced pre-tax income of $10 million. The difference between effective combined tax rates in the lowest-tax state and the highest-tax state was 15.19 percent, or about $1.5 million.(68) It is quite possible that savings in labor, land, or transportation costs in the high-tax state could exceed $1.5 million.
A second criticism of the Barents study is that it did not consider differences in public services to either businesses or households. If one state offers better education or better highways, businesses and households might be willing to accept a higher tax burden.
A third criticism is that taxes were calculated in a straightforward way without taking advantage of various tax avoidance techniques such as using nongeneral tax incentive programs, creating subsidiaries specifically to take advantage of certain tax exemptions,(69) or shifting profits to other states via sophisticated transfer pricing.
While thoughtfully conceived and carefully executed, the Barents study findings, nevertheless, should be taken only as a guide to the business and household tax burden rankings of the comparison states.
The University of Kentucky Center for Business and Economic Research and University of Louisville College of Business and Public Administration study divided tax revenue into business and personal categories, then summed the business tax revenue and divided both business taxes and total taxes by an aggregate measure of taxpaying capacity to calculate an “effective tax rate.” The study examined state taxes and combined state and local taxes in Kentucky and the seven states that border Kentucky.
The taxes allocated to business included the following: the corporation income tax, business license taxes, severance taxes, public utility taxes, the business share of property taxes, unemployment insurance taxes, and workers’ compensation costs.(70) No portion of sales taxes was allocated to business. (Recall that the Barents study calculated sales and use taxes on business purchases of intermediate goods but did not include public utilities taxes, the unemployment insurance tax, or workers’ compensation costs.)
The UK-UL study found that Kentucky’s state business tax burden was 65.2 percent higher than the unweighted average for all eight states.(71) Kentucky’s combined state and local business tax burden was 8.4 percent above the eight-state average. Kentucky’s total state and local tax burden—business and household—was 15.1 percent above the eight-state average, implying that our households are burdened even more than our businesses.
Critique. The main reason that Kentucky’s business tax burden appeared to be so high in the UK-UL study was the peculiar choice of tax base. Most studies that select a single broad measure of taxpaying capacity as the tax base use total personal income. UK-UL used private earnings. Private earnings consist of wages and salaries, employee benefits, and proprietors’ income. Total personal income includes property income (dividends, interest, and rent) and transfer payments (such as Social Security benefits) as well.
Table 9 reveals that Kentucky’s ratio of private earnings to total personal income is lower than in five of the seven contiguous states. Thus, using private earnings as the tax base inflates Kentucky’s tax-burden ranking. And it turned the Barents study on its head: Barents used pre-tax profits as its tax base; UK-UL did not even include profits in its tax base.
Table 9: Selected Economic Data for Kentucky and Neighboring States, 1998
Private Gross State Product (GSP) would have been a better tax base, both conceptually and in fairness to Kentucky. Private GSP is a good measure of business taxpaying capacity, since it is by definition the sum of all value added by businesses (total sales minus purchases from other businesses). Table 9 shows that the ratios of private GSP to total GSP are higher and more uniform than the ratios of private earnings to total personal income.
A second criticism of the UK-UL study is that it reported the burden of state taxes separately. Kentucky raises a higher portion of tax revenue at the state level than any of the comparison states except West Virginia, as also shown in Table 9. Thus, any comparison that omits local taxes is deceptive and unfairly disadvantages Kentucky.
UK-UL’s failure to include the business portion of sales and use taxes may also be faulted. Several of the comparison states allow localities to impose sales taxes while Kentucky does not. And UK-UL included the unemployment insurance (UI) tax and workers compensation (WC) costs, which can be questioned. Most economists believe that the UI tax is shifted backward to employees.(72) WC costs depend upon industry and firm risk factors that are independent of geographic location.(73)
Like the Barents analysis, the UK-UL study can also be criticized for ignoring differences in labor, energy, and transportation costs and for not examining the quantity and quality of public services.
On balance, the UK-UL study gives a misleading picture of Kentucky’s relative business tax burden. The next section presents several alternative new calculations of business tax burdens in Kentucky and surrounding states.
Data on state and local tax revenue in 1998 were obtained for Kentucky and contiguous states from the U.S. Bureau of the Census. The National Academy of Social Insurance(74) provided workers’ compensation data. Tax revenue was allocated into business and household shares and then divided by each of four broad tax bases: total personal income, private earnings, gross state product (GSP), and private GSP, all of which were obtained from the U.S. Bureau of Economic Analysis (BEA).(75)
Two measures of business taxation were calculated: general business taxes and comprehensive business taxes. General business taxes included 100 percent of corporation income, corporation license, and other business license taxes, plus portions of property, sales, and insurance premium taxes.(76) Comprehensive business taxes added pari-mutuel, severance, and unemployment insurance taxes, and workers’ compensation benefits.(77) Our measure of general business taxes was close to the definition used in the Barents study; our measure of comprehensive business taxes approximates the measure used in the UK-UL study.
Neither measure of business taxes included personal income taxes paid by unincorporated businesses (proprietorships, partnerships, or farms). This omission is common to business tax studies, primarily because of the difficulty of developing estimates of taxes paid. However, at the national level, the total earnings of unincorporated businesses, proprietors’ income, was less than 5 percent of corporate profits in 1998.(78) This implies that corporations account for an overwhelming percentage of economic output.
Total personal income and GSP are broad measures of economic activity that reflect total taxpaying capacity. Private earnings omit all property income and are therefore a peculiar measure of business taxpaying capacity. Private GSP is a better business tax base because it is a measure of production in the private sector.
Table 10 illustrates general business tax burdens: general business taxes divided by each of the four tax bases. As expected, Kentucky’s relative burden was highest when divided by private earnings: 107.0 percent of the eight-state average. Our rank was third highest among the eight states. When measured against total personal income, Kentucky’s relative business tax burden fell to 101.6 percent of average, and our rank fell to fourth. Measured against either GSP or private GSP, Kentucky’s relative tax burden was slightly below average, and our rank was fifth.
Figure 20 charts the business tax burdens of each state relative to private GSP in rank order. The state with the lowest burden, Virginia, pays $1.98 in business taxes for each $100 of private GSP; Tennessee has the highest burden at $2.90 per $100.
Table 11 compares comprehensive business tax burdens in the eight states, again dividing business taxes by each of the four tax bases. Kentucky’s relative burdens were slightly higher on the comprehensive business tax measures. Kentucky had the second highest relative burden, 108.0 percent of the eight-state average, when private earnings were used as the tax base. West Virginia’s relative burden was 156.5 percent of the average, the highest of these states.
When assessed against total personal income, Kentucky’s comprehensive business tax burden was 103.4 percent of average, and our rank fell to third. Measured against GSP, Kentucky ranked sixth, with a below-average relative tax burden. When computed against private GSP, Kentucky ranked third, and our relative tax burden was about average.
Kentucky’s weaker performance on the comprehensive measure of business taxes is largely attributable to the coal industry. Kentucky and West Virginia are the only two states that have significant severance tax revenue. And since injury and illness rates are high in the mining industry, mining states tend to have high workers’ compensation benefits. Kentucky’s percentage of comprehensive business tax revenue from severance taxes and workers’ compensation benefits exceeds the percentages in all but two comparison states (Ohio and West Virginia).
Figure 21 charts the comprehensive business tax burdens of each state relative to private GSP, in rank order. The state with the lowest burden was again Virginia, which paid $2.41 in comprehensive business taxes for each $100 of private GSP. West Virginia had by far the highest burden at $4.94 per $100; nearly half of West Virginia’s comprehensive tax revenue was produced by severance taxes and workers’ compensation benefits.
Kentucky’s relative personal tax burdens exceed our business tax burdens. Table 12 compares personal tax burdens in the eight states, again dividing taxes by each of the four tax bases. (Personal taxes were computed by deducting comprehensive business taxes from total taxes.) Kentucky again had the highest relative burden, 113.6 percent of the eight-state average when private earnings were used as the tax base. Kentucky had the second highest personal tax burden on private earnings.
Table 12: Personal Taxes per $100 of Selected Tax Bases, Kentucky and Surrounding States, 1998
Kentucky’s personal tax burden fell to 109.0 percent of the average when total personal income was the measure of taxpaying capacity; our rank was third. Measured against GSP, Kentucky again ranked third and our burden was 4.0 percent above average. With private GSP as the tax base, Kentucky ranked fourth with a burden equal to 105.2 percent of average.
Figure 22 illustrates the personal tax burdens of each state relative to private GSP, in rank order. The state with the lowest burden was Tennessee, which paid $5.10 in personal taxes for each $100 of private GSP. The state with the highest burden was West Virginia, at $8.93 per $100.
The business tax revenue measures used in this report have already been adjusted for economic development incentives that reduce business taxes. But revenue has not been adjusted for nonbusiness tax subsidies that Kentucky (and perhaps other states) grant to businesses. Four Kentucky programs(79) allow firms that invest in Kentucky to keep a portion (from 2 percent to 6 percent) of their employees’ individual income tax withholding as a “credit.”(80) In Fiscal Year (FY) 2001, $35.4 million in state wage assessment credits are expected to be claimed.(81) Moreover, many local governments allow the firms that receive state incentives to keep a portion of local payroll taxes as well. The dollar value of credits claimed at the local level is unknown.
Another state incentive program, the Kentucky Tourism Development Act, enacted in 1996 and since expanded, allows tourism businesses to take a refundable credit against the state sales tax. The revenue loss attributable to this program is projected to be $1.8 million in FY 2002.(82)
The tax credits that businesses are allowed to claim against personal taxes distort the measurement of business tax burdens and increase the difficulty of forecasting personal tax revenue. It would be more transparent if Kentucky treated these nonbusiness tax incentives as expenditures and simply wrote checks.
Kentucky’s general business tax burden, measured against private GSP, is average compared to our surrounding states. A comprehensive measure of business taxes found that Kentucky’s burden is slightly above average, primarily because Kentucky levies severance taxes and incurs high workers’ compensation benefits. Both of these factors relate to Kentucky’s coal mining industry.
Kentucky’s personal tax burden, on the other hand, has been found to be well above average in this study and in earlier studies by the ACIR, Barents, and even UK-UL. Kentucky is a poor state that must levy relatively high taxes to provide an average level of public services. But the high tax burden is borne disproportionately by individual taxpayers, not businesses.
The methods used to divide property, sales, and insurance premium tax revenue into business and household shares were as follows:
Property. Several states reported data on both assessments and revenue by type of property (Kentucky, Ohio, and Virginia). In each case revenue shares attributable to business were very close to business shares of assessed values. Illinois provided data on revenue, and Tennessee provided data only on assessments. I was unable to obtain any data from Indiana, Missouri, or West Virginia. However, there was remarkable consistency in the data that were available: about 50 percent of state government property taxes and 40 percent of local government were paid by businesses.
General Sales. Estimated business shares of general sales taxes were obtained from a National Tax Journal(83) article. Kentucky’s business share of 46 percent exceeded shares in all comparison states except Indiana, which also had a 46 percent business share.
Insurance Premiums. National data on business and individual shares of insurance premiums for life, health, and property/casualty insurance were obtained from The Statistical Abstract of the United States. State data on life insurance shares were obtained from the Life Insurance Fact Book.(84) State data on health and property/casualty insurance could not be found. However, life insurance shares were nearly the same in all states. Therefore, the average nationwide share of all insurance premiums paid by businesses, 47.5 percent, was applied to each state’s insurance premium revenue.
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41 William H. Hoyt, Mark C. Berger, and Paul A. Coomes, Statutory and Economic Incidence of Taxes in Kentucky and Surrounding States (University of Kentucky, Center for Business and Economic Research & University of Louisville, College for Business and Public Administration, 2001). Return to text.
42 William H. Oakland and William A. Testa, “State-Local Business Taxation and the Benefits Principle,” Economic Perspectives 20.1 (1995): 3. Return to text.
43 Oakland and Testa 4. Return to text.
44 Harvey S. Rosen, Public Finance, 5th ed. (Boston, MA: Irwin McGraw-Hill, 1999) 262-3. Return to text.
45 Rosen 267. Return to text.
46 George R. Zodrow, “The Property Tax as a Capital Tax: A Room with Three Views,” National Tax Journal 54.1 (2001): 139-156. Return to text.
47 Oakland and Testa 2. Return to text.
48 Oakland and Testa 5. Return to text.
49 Oakland and Testa 10. Return to text.
50 Robert W. Cox (Kentucky Cabinet for Finance and Administration), “Business Taxes and Tax Incentives: What’s Going On Here?” unpublished article, Frankfort, 1996, 16. Return to text.
51 U.S. Census Bureau, Statistical Abstract of the United States: 2000, Tables 742: 469 and 759: 477, 120th ed. (Washington, D.C.: U.S. Department of Commerce, 2000). Return to text.
52 U.S. Census Bureau, Statistical Abstract, Table 764: 481. Return to text.
53 Tax Research Division, 1995 Minnesota Tax Incidence Study (St. Paul, MN: Department of Revenue, 1995) 34. Return to text.
54 Mark Zandi and Wesley Basel, The High Price of High Costs, Regional Financial Associates Research Paper, West Chester, PA, Oct. 1994. Return to text.
55 U.S. Census Bureau, Statistical Abstract, Table 727: 460 (Washington: U.S. Department of Commerce, 2001); available at: http://www.census.gov/govs/estimate/9818ky.html and ftp://www.census.gov/govs/pub/outgoing/97REX1.xls. Return to text.
56 William C. Wheaton, “Interstate Differences in the Level of Business Taxation,” National Tax Journal 36.1 (1983): 84-5. Return to text.
57 Wheaton 89. Return to text.
58 Advisory Commission on Intergovernmental Relations, RTS 1991 State Revenue Capacity and Effort, Report M-187, Washington, D.C., Sept. 1993, as reported in KY Economic Development Corp., Kentucky’s Tax Competitiveness (Lexington, KY: Author, 1993). Return to text.
59 KY Economic Development Corp. 15. Return to text.
60 KY Economic Development Corp. 18. Return to text.
61 The seven contiguous states plus all southeastern states except Florida and Louisiana, plus Michigan. Return to text.
62 KY Economic Development Corp. 41. Return to text.
63 Barents Group, LLC, Comparative Analysis of Kentucky’s Tax Structure (Washington, D.C.: Author, 1999) 40. Return to text.
64 Barents 17. Return to text.
65 Barents 46. Return to text.
66 Barents 68. Return to text.
67 Barents 69-80. Return to text.
68 Barents, Table 4-5, 50. Return to text.
69 For example, Kentucky law allows manufacturers to exempt from the use tax any energy costs in excess of 3 percent of their total cost of production. Some manufacturers reduce their total cost of production—and thus increase the share of energy costs—by not taking possession of raw materials. Instead, they create subsidiaries which then contract with the parent manufacturer to process raw materials into finished goods. This device reduced Kentucky sales and use tax revenue by an estimated $37 million per year in FY 2001 and 2002. See Robert W. Cox, “Sales and Use Tax Revenue Receipts,” memorandum to Dr. James R. Ramsey, State Budget Director, Governor’s Office for Economic Analysis, 18 May 2000, Frankfort. Return to text.
70 Hoyt iii. Return to text.
71 Hoyt 5. Return to text.
72 Harvey S. Rosen, Public Finance, 5th ed. (Boston: Irwin McGraw-Hill, 1999) 267. Return to text.
73 Daniel Mont, John F. Burton, Jr., Virginia Reno, and Cecili Thompson, Workers’ Compensation: Benefits, Coverage, and Costs, 1999 New Estimates and 1996-98 Revisions (Washington: National Academy of Social Insurance, 2001) 22. Return to text.
74 Mont. Return to text.
75 Newman, Jeffrey L., “State Personal Income, Revised Estimates for 1997-99,” Survey of Current Business 80.10 (2000): 63-67. Return to text.
76 The methods used to estimate business shares of tax revenue are discussed in the chapter Appendix on page 72. Return to text.
77 Because workers’ compensation premium costs were not available, benefits paid was the measure used, as suggested by the National Academy of Social Insurance (see Mont 22.) Return to text.
78 Richard M. Beemiller and Clifford H. Woodruff III, “Gross State Product by Industry, 1997-98,” Survey of Current Business 80.10 (2000): 69-90 and Appendix B, 80. Return to text.
79 The four are: Kentucky Rural Economic Development Authority (KREDA), Kentucky Industrial Development Authority (KIDA), Kentucky Industrial Revitalization Authority (KIRA), and Kentucky Jobs Development Authority (KJDA). Recall that credits allowed by the KIDA and KJDA programs were included in the Barents study. Return to text.
80 Office of Financial Management and Economic Analysis, KY Finance and Administration Cabinet, “The Fiscal Impact of Economic Development Tax Incentives,” Kentucky Quarterly Economic & Revenue Report, Fourth Quarter Report, Fiscal Year 1999, annual ed., Frankfort, 1999. Return to text.
81 Office of Financial Management and Economic Analysis 25. Return to text.
82 Finance and Administration Cabinet, Commonwealth of Kentucky, “Tax Expenditure Analysis, Fiscal Years 2000-2002,” Frankfort, KY, Oct. 1999, 105. Return to text.
83 Raymond J. Ring Jr., “Consumers’ Share and Producers’ Share of the General Sales Tax,” National Tax Journal 52:1 (1999): 79-90. Return to text.
84 American Council of Life Insurance, Life Insurance Fact Book, 2000 (Washington: Author, 2000). Return to text.