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Governor Blagojevich: Meet Economics 101

3 min readBy: Gerald Prante

In his State of the State Address on Wednesday, Illinois Governor Rod Blagojevich put forth a taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increase to fund higher spending on children’s health and education, which included the imposing of a gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. on the state (See blog post below). Regardless of how high the governor may want to increase spending (even if he wanted to triple it), a gross receipts tax is the one of the worst ways to raise the revenue for that spending.

In his presentation, the governor tried to dismiss other alternatives. Specifically, here is what he said regarding three other revenue-raising options, and where he is wrong.

Income Tax Increase

The Governor: “Increasing the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. would increase the overall tax burden paid by Illinois workers and families.”

Reality: Putting in place a gross receipts tax also increases the overall tax burden paid by Illinois workers and families, and it increases the economic distortions caused by taxation, raising the overall tax burden on Illinois much more than a similar revenue increase in the individual income tax would.

Sales TaxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. Increase

The Governor: “Expanding the sales tax to certain services could be economically disruptive, and would disproportionately impact low income and working families.”

Reality: A gross receipts tax will also disproportionately impact low-income and working families, much more so than the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. . If proponents of gross receipt taxes used common sense rather than political rhetoric about rich and poor, they would realize that the gross receipts tax at the retail end is exactly the same as the retail sales tax. If you buy 2 sodas for $1 each and the sales tax is 6 percent, that tax (12 cents) is equal to the tax rate (.06) multiplied by the quantity (2) multiplied by the price ($1). But as anyone who has taken a basic microeconomics class knows, revenue (gross receipts) is merely price multiplied by quantity. Hence, a sales tax is no different than the portion of the gross receipts tax that is levied at the retail end. A gross receipts tax is just much worse than a retail sales tax because it imposes the tax on revenue at every stage of the production chain (not just the final retail sale), thereby raising the final price multiple times. The fact is that while the governor says he is doing this out of concern for working and low-income families, no other tax increase measure would fall more on the poor than a gross receipts tax (unless he wanted to do a head taxA head tax, also known as a poll tax or capitation, is a flat or uniform tax levied equally on every taxpayer. Unlike an income tax, it is a fixed amount and not based on how much one earns, nor does it change based on any taxpayer circumstance or action. ). There is a reason that the Census Bureau puts gross receipts taxes and general sales taxes in the same tax revenue category (see page 10 of link) – they are very similar, even though gross receipts taxes are much worse economically.

Corporate Income Tax Increase

The Governor: “Corporate income tax increases remain subject to loopholes and exclusions. Over half of all large business avoid Illinois taxation already. It would impose a high tax on a few industries rather than a lower tax on the Illinois economy as a whole.”

Reality: If the corporate income tax is filled with loopholes and exclusions, then get rid of the loopholes and exclusions. What’s ironic about this statement is that the governor also filled the new gross receipts tax with many loopholes and exclusions, and it will likely end up looking like Swiss cheese in 10 years if it’s ever enacted. Finally, the governor needs to understand that no business pays taxes. People pay taxes, whether they are the owners of the capital, workers, or consumers. And imposing taxes on businesses, while it may have a nice populist appeal, can hurt low-income individuals just as much as the wealthy owners of the business who will allegedly (according to the governor) pay the tax. It all depends on the economic incidence of the taxation, not on the governor’s desire to target specific groups of taxpayers.

For more on why gross receipts taxes are inferior methods of funding government, check out two recent Tax Foundation publications on the topic here and here. Also, check out a John Mikesell podcast on the issue.