Facing a $500 million budget deficit, Kentucky Gov. Paul Patton, a Democrat, has proposed that the state replace its standard corporate tax with a business activity tax that would calculate taxes based on a business's gross revenue rather than its profit. Companies in the red would still owe taxes under the proposed law.

Though many states have toyed with the idea, only Michigan has ever passed a business activity measure, back in the 1970s. The unpopular tax spawned a number of lawsuits, and the legislature is currently phasing it out. Nevertheless, Patton says his tax would bring a much-needed $400 million to the state coffers in 2004. He adds that it is necessary because, after he raised the corporate tax in the 1990s, funds to the treasury actually fell, as companies used loopholes to avoid taxes. On several occasions, Patton has reportedly quipped, "Anybody that's paying corporate taxes in Kentucky today has got a bad accountant."

As Patton's second term is almost up, it is unlikely his proposal will become law. The state general assembly is not scheduled to meet again until a new governor has been elected. Still, the business activity tax demonstrates just how dire states' finances are -- and how such shortfalls could hurt businesses.