It is the 11th hour in the debate over replacing the Michigan Single Business Tax. Both the House (controlled by Democrats) and the Senate (controlled by Republicans) have conceded that the replacement should be revenue-neutral and feature a tax on business profits. The major remaining point of contention is whether the replacement plan should also contain 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. on net worth (House) or gross receipts (Senate).
Some in the Senate defend gross receipts taxes on the ground that they are more “stable.” By stability, one assumes they mean that it will collect revenues in a smooth manner, relatively unobstructed by the ups and downs of the economy.
While our definition of tax stability is somewhat different, there is something to be said for a tax that collects stable revenues. Unfortunately, there is little evidence that 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. is “stable” in this sense.
John Mikesell explored the stability of gross receipts taxes (and other issues involved with such taxes) in a Tax Foundation/COST Background Paper that was released earlier this year. In general, he found that gross receipts taxes are no more or less stable than other common types of state taxes:
“A gross receipts tax appears to be roughly as stable as a retail sales tax. Its variations do not contribute to the overall stability of total state revenue because its fluctuations follow generally the same pattern as other major taxes.” (See page 1).
He made this claim due to data he collected on taxes collected by Washington and Oregon. He presented his findings in Table 1 of his report, which is partially reproduced below:
|
Stability Characteristics of State Tax Bases, 1995 – 2005 |
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|
Washington Business and Occupations Tax Base |
Washington Retail Sales Tax Base |
Oregon Adjusted Gross Income |
Oregon Corporate Income Tax Revenues |
|
|
Annual Change (mean) |
5.28% |
5.89% |
5.09% |
4.96% |
|
Standard Deviation |
0.0461 |
0.0387 |
0.0537 |
0.2655 |
|
Highest Change |
10.87% |
9.79% |
11.70% |
41.90% |
|
Lowest Change |
-3.23% |
1.00% |
-4.50% |
-39.20% |
|
Correlation with B&O base |
n/a |
.8802 |
.9192 |
.8947 |
Source: John Mikesell, Gross Receipts Taxes: A Review of their History and Performance, Tax Foundation/COST Background Paper No. 53 (January 2007)
As the data show, the gross receipts tax in Washington does not appear to be significantly more stable than the other major taxes in Washington and Oregon. Mikesell found the retail 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. to be the most stable, then the gross receipts tax, which was followed closely by the individual income tax, and finally 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. .
Of course, even if the gross receipts tax were more stable than other taxes, their well-know negatives would certainly outweigh any stability they would bring to Michigan’s revenue system. Those negatives, chiefly caused by the pyramiding nature of gross receipts taxes, are covered in detail in Mikesell’s study as well as a shorter study by our own economists.
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