Be Prepared for Taxation Changes at all Levels

As the country enters a new year and a hugely different government administration at the federal level, there is plenty of news out about coming change in business taxation. Unfortunately, most of it is not good news, with coming business tax increases almost a certainty. Instead of just looking at the macro government level, go micro and check out what may be happening around the country when it comes to city and county taxation of business.

An Example of One City’s Taxation Discussions

The city of Georgetown, KY has been the subject of articles related to the city council’s discussion of revenue shortages and how to increase revenue through business taxation changesⁱ. From the article: “In preparation for the 2021-22 fiscal year budget, Georgetown Mayor Tom Prather alerted council members Monday he hopes to transition how businesses are taxed from a net profit to a gross receipts tax.”

In addition to the tax increase discussion, the mayor has asked the council to increase taxes on insurance premiums. The rates would go from 5% up to 8% and will go into effect for the next fiscal year beginning July 1, 2021. Even before the pandemic, the city unveiled a study comparing Georgetown’s revenues and expenses to 18 peer cities. The primary area of concern exposed in the comparison was the underpaid and understaffed police and fire departments. This was despite the imposition of a 911 fee to help with funding the departments.

The currently proposed changes would provide some temporary relief, and the city expects to have to readdress the issues in three years. Prather said: “A study of the city’s tax structure has revealed a weakness in how businesses are taxed.” He went on to say: “We need to look at a totally different tax structure.” What is happening now is totally unfair to our city’s small and medium size businesses. It is unfair to employees. Right now, 74 percent of the city’s revenues are paid by workers through their payroll taxes.”

The statements about having to increase revenues along with being fairer to businesses, seem to be in opposition. Changing taxation by adding a gross receipts tax will have varying impacts on businesses based on their revenue and expense structures. Assuming that every business has the same ratio of revenue to expenses is not realistic.

Those businesses with extremely high expenses relative to revenue operate at lower gross and net profit margins. One business with a 65% gross profit margin will feel far less of an impact of a gross receipts tax increase than a business with a 35% gross profit margin. Many retail businesses operate with low gross margins, profiting from volume rather than higher margins.

While both business types with the different gross margins could realize the same gross revenues, the effects of a gross receipts tax would be far more of a burden on the lower margin business.

The takeaway here is that business owners should pay attention to their local government initiatives and voice their concerns related to taxation changes. If a business is growing and must relocate to a larger business structure, perhaps they should look carefully at different tax jurisdictions in making a location decision.

i Aligning Kentucky’s Tax Code for Growth – Tax Foundation