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Illinois Economic Consultant Continues Misguided Campaign for Gross Receipts Tax

4 min readBy: William Ahern

As a champion of Gov. Blagojevich’s proposal for a huge new 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. , Douglas Kane, former state rep and now economic consultant to the Governor, is scrambling to deflect the volley of criticism that comes from every corner of academia.

See J. Fred Giertz, professor of economics, University of Illinois at Urbana-Champaign:

“The good news is that the governor finally recognizes the serious budget problems facing the state. The bad news is that he has responded by proposing an overly large 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 that makes use of an inferior tax instrument.”

See David Brunori, tax attorney and contributing editor, State Tax Notes:

“Gross receipts taxes are terrible ways to raise revenue. One of their biggest problems is that they are hidden taxes. No one who bears the burden is aware of it. That alone should be reason to reject gross receipts taxes. I hope this is not the start of a bad trend.”

See John L. Mikesell, professor of public finance, Indiana University School of Public and Environmental Affairs:

“There is no sensible case for gross receipts taxation. The old turnover taxes–typically adopted as desperation measures in fiscal crisis–were replaced with taxes that created fewer economic problems. They do not belong in any program of tax reform.”

Those authorities aren’t even anti-tax generally, but they’re all opposed to gross receipts taxes, and for good reason. Among all the business taxes that Illinois might enact, the gross receipts tax would be the least fair and the most economically damaging.

Here’s our own paper on the matter: Tax Pyramiding: The Economic Consequences of Gross Receipts Taxes

Kane tries numerous rhetorical devices to bolster the sagging prospects of the Blagojevich gross receipts tax. Most recently, he’s been flogging the Washington State tactic, which goes like this: (1) Gross receipts taxes are simple, with a single low rate and a broad base; (2) Washington State has that sort of simple gross receipts tax, and the state’s economy is doing well; so (3) Illinois can do the same.

A more accurate version of the Washington State situation would be: (1) Gross receipts taxes have a blizzard of different rates and bases; (2) Washington State has that type of complex tax on gross receipts, and their state’s economy does well despite this because they have no tax on personal income; and (3) Illinois’s tax system is in no way comparable to Washington State’s.

To prove that Washington State’s gross receipts tax, which is officially known as the Business & Occupation (B&O) tax, is monstrously complex, it probably shouldn’t be necessary to do more than quote a recent bulletin from that state’s department of revenue on the tax rate applied to aircraft repair facilities:

“The reduced B&O tax rate for Federal Aviation Administration certificated repair stations engaged in the repair of equipment used in interstate or foreign commerce is extended to July 1, 2011. The tax rate is set at 0.2904 percent.”

Like FAA-licensed repair facilities, facilities that label canned salmon recently got a B&O rate break, down from 1.5% to .484%. Every business is assigned a B&O tax classification with different rates, exemptions and credits. To name just a few:

• Manufacturing Dairy Products: 0.138 percent.
• Travel Agent Commissions: 0.275 percent.
• Retailing (generally): 0.471 percent.
• Wholesaling: 0.484 percent.
• Gambling Contests of Chance: 1.5 percent.

And on and on. The list of businesses that receive special deductions and exemptions is as long as the list of different rates: investments, dues, interest on agricultural loans, health care providers, beef processing, research and development, insurance premiums, real estate sales, nonprofit organizations, janitorial services, and fruit and vegetable processing.

This whole circus of separate rates for each industry comes from the nature of gross receipts taxation. It’s not based on profit, so each industry’s profitability and costs are constantly weighed by politicians who decide on rates and exemptions and credits. It’s a crazy way to tax, and nothing Mr. Kane says otherwise should persuade anyone.

As an organization dedicated to improving tax policy, the Tax Foundation cannot say enough bad things about the new trend toward gross receipts taxation. Illinois is the most prominent state in that debate right now, and here are some of the “Fiscal Facts” we’ve published to persuade lawmakers and citizens there that Gov. Blagojevich and Mr. Kane are wrong:

Movin’ on Up: Blagojevich Tax Increase Would Move Illinois into Top 10 on State and Local Tax Burden

The Hidden Tax for Sm(all) Business in Governor Blagojevich’s Gross Receipts Tax

Governor Blagojevich’s Gross Receipts Tax Plan Represents Largest State Tax Increase This Decade