Delaware Bill Reveals Major Flaw of Gross Receipts Taxes

January 25, 2007

Lawmakers in Delaware are currently debating a bill (H.B. 12) that would exempt automakers from the state's gross receipts tax.

Legislation to exempt Delaware's two auto manufacturers from the state's gross receipts tax will be introduced when the General Assembly convenes next week, an initial step toward persuading DaimlerChrysler to keep its Newark assembly plant open.

The Tax Foundation is constantly educating lawmakers, the media and the public about the dangers of gross receipts taxes, and the Delaware bill is a prime example of why.

One of the key findings in a recent Tax Foundation paper about gross receipts taxes is they impose varying effective tax rates across industries, tilting the market in favor of those sectors not hit as hard by the tax. Often, companies in the same industry can experience vastly different effective tax rates.

Furthermore, lawmakers are under constant pressure to levy different rates for different companies because of lack of horizontal equity inherent in gross receipts taxes. Horizontal equity means that taxpayers with similar levels of income pay equal amounts.

Washington's Business and Occupation tax, now the nation's oldest gross receipts tax, is a good example because it levies six different rates varying by industry. It remains to be seen whether newly implemented gross receipts taxes in Ohio and Texas can avoid varying rates, but history shows that has never happened. Kentucky's gross receipts tax, only one year old, is already under intense pressure to lower its rate for retail companies.

Delaware lawmakers should avoid the pressure put on them by DaimlerChrylser and not grant the preferential treatment. If automakers in Delaware deserve repeal of the gross receipts tax then all companies do. Delaware would be better served by a full repeal anyway.

To learn more about gross receipts taxes read the 2007 State Business Tax Climate Index and look for a forthcoming report by professor John Mikesell of Indiana University.

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