Carson, California, Considers a Gross Receipts Tax
September 28, 2017
Gross receipts taxes continue to spring up across the country. More than five states have considered the issue just this year; while no state has officially created one, a number of states could revisit that decision in 2018. And now, a local government is getting in on the conversation. The City Council of Carson, California, is asking voters an important question this November: Should the city create a new gross receipts tax to help close the city’s budget gap?
If adopted by voters, the city would create a gross receipts tax of 0.25 percent, but unlike a more broadly-applied gross receipts tax, this one would apply only to “any facility where petroleum or petroleum products are blended, mixed, processed, or refined and/or any facility that stores petroleum products.” Carson is home to several oil refineries and pipelines. The city estimates that the new tax would raise $24 million.
Instituting this tax would be the wrong approach to closing Carson’s budget gap. The economic distortions created by a gross receipts tax are well-documented. While this would be targeted to only one industry—which could work to limit the pyramiding slightly—petroleum and petroleum products are a necessary input to many other industries. The tax would result in higher input costs for firms, leading to higher final costs for consumers.
The proposal does specifically note that it wouldn’t apply to “retail gasoline sales,” but even without that protection, consumers could see higher prices at the pump due to the upstream pyramiding and cost increases.
Additionally, the legislative analysis provided to the City Council prior to its vote seems to misunderstand how gross receipts taxes function. The report, in its section discussing the gross receipts tax option, states “they [gross receipts taxes] directly match the ability to pay to the duty to pay as businesses which generate more revenues have greater ability to pay.” This is not obviously true. It ignores a key component, profit margin. Two firms with the same amount of revenue could have vastly different abilities to pay based on their costs. Profit margins vary widely by industry, but also by year. Gross receipts taxes actually punish low-margin firms. Similarly, the tax would hurt firms that are unprofitable.
Creating a gross receipts tax, even a targeted one, is a misguided approach to closing the budget deficit for Carson, California.
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