Under pressure from local small business groups, state lawmakers in Kentucky last week approved a bill that substantially lowers the tax burden on smaller firms -- in part by suspending proposed tax cuts for large corporations.

The bill, which passed the House 98-0 on March 17 and now heads to the Senate, offers a sharp reversal of Gov. Ernie Fletcher's newly minted tax reform plan, which inadvertently raised the tax bill for many small businesses, trade and lobby groups said.

"What we had here was a case of unintended consequences," said Tom Underhill of the Kentucky Small Business Caucus, which represents some 40 local small-business groups.

"No one set out to stick it to small business, but that's what happened," he said. "This bill offers some hope of relief."

Among other measures, Fletcher's Tax Modernization Act, which was enacted in March 2005 and applies retroactively to Jan. 1, 2005, redefined the term corporation to include a wide range of business entities and charged them a minimum corporate tax of $175.

It also established an alternative minimum calculation, or AMC, under which businesses would be taxed on net income, gross receipts, or gross profits -- whichever was highest.

Only eight other states have enacted gross-receipt taxes.

"This was a huge issue for small business," said Chris Derry, president of the Bluegrass Institute, a Kentucky-based policy think-tank. "They were mad has hell."

Derry said for any business with thin profit margins -- such as grocery stores, restaurants, and car dealerships -- gross-receipt taxes are the "most heinous possible," because they apply whether or not a business is profitable in given year.

According to Underhill, who also heads the local branch of the National Federation of Independent Business, a Washington-based lobby group, the measure saw many small businesses paying corporate taxes for the first time. "It was really killing people," he said.

On Jan. 19, more than 200 small-business owners gathered in front of the statehouse to rally against the measure.

Under the bill passed last week, businesses with less the $3 million in gross annual profits would be exempt from the AMC.

The bill also allows owners to claim deductions from so-called "pass-through" business entities on their personal income taxes, while offsetting profits from one business with losses from another -- initiatives which were barred under last year's tax overhaul.

As a counterbalance to the cuts, which some estimates put in the tens of millions of dollars, the bill would raise the minimum corporate tax to $200. It would also delay a drop in the top corporate tax rate from 7% to 6% until 2009.