Governor Blagojevich: Meet Economics 101

In his State of the State Address on Wednesday, Illinois Governor Rod Blagojevich put forth a tax increase to fund higher spending on children’s health and education, which included the imposing of a gross receipts tax 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 tax 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 Tax 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 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 tax). 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.