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Truthy Claims About Gross Receipts Taxes

2 min readBy: Chris Atkins, Brian Phillips

Supporters of Illinois Governor Blagojevich’s 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. have floated claims that have an air of “truthiness” about them. Here we analyze a number of those claims:

Truthy Claim: Gross Receipt 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. es (GRT) are low rate taxes.
Maybe. There is nothing inherent about gross receipts taxes that make their rates low. The statutory rates are set based on the revenue lawmakers want to raise. If enacted, the proposed statutory rate in Illinois would be the highest GRT rate in the country.

Truthy Claim: A GRT’s broad base is more economically sound than other tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. s.
Wrong. Though a broader tax base is generally preferable to a narrow one, the GRT base is economically irrational. In many cases, the GRT base can exceed the state’s entire final economic output. Broad coverage of a reasonable base, not broad coverage alone, is the proper standard. If broad coverage alone were the standard, a tax on grains of sand, blades of grass, or people named Smith would make the most sense.

Truthy Claim: A GRT does not discriminate.
Flat out false. GRTs heavily discriminate based on business structure. The effective tax rate for a business depends on nature of the industry and the length of the production chain. This discrimination gives companies an artificial incentive to vertically integrate, take on responsibilities that make production less efficient, or seek to avoid the tax.

Truthy Claim: GRTs closes corporate loopholes.
False. There is nothing about a GRT structure that prevents lawmakers from writing loopholes into the law. Indeed, even the Illinois Governor’s own GRT plan already includes some loopholes, special rates, exemptions, etc. Corporate loopholes can be closed without imposing a gross receipts tax.

Truthy Claim: GRT is a “new” tax.
Only if Leonardo da Vinci is considered a “new” artist! GRTs date back to the thirteenth century in Europe. They first reared their ugly head in the U.S. by the mid-1800s.

Truthy Claim: GRTs work in other states.
If by “work” you mean create a host of complex problems that have to be addressed year after year, then sure. Washington State has had a GRT since 1933 and they are routinely heading back to the drawing board. Research indicates that GRTs do not appear to contribute to the overall stability of a state tax system.

Truthy Claim: GRTs grow with the economy.
So does every other tax. This is like using “wetness” to compare tap water to bottled water.

Truthy Claim: GRTs are sound tax policy.
Actually, they are one of the worst tax systems ever created. GRTs are irrationally broad; create effective tax rates that vary depending on the industry; show no effect on revenue stability; distort the market through “pyramiding”; make businesses less competitive; and hide the true cost of the tax from the individuals who pay it.