San Francisco Sends Problematic Gross Receipts Tax to November Ballot

August 1, 2012

San Francisco’s Board of Supervisors voted unanimously yesterday to place a business gross receipts tax on the November ballot. The tax would replace an existing 1.5 percent tax on business payrolls and is designed to raise the same amount of money per year (approximately $410 million).

Labor-intensive businesses had pushed for the change, which would shift tax burdens away from them toward other businesses. If adopted by voters, the change would be gradual, with the one tax not fully phased out and the other not fully phased in until 2018. Supervisors highlighted businesses that will save money, and the business community applauded the move, although the fact that this raises the same amount of money suggests that there will be as many losers as winners.

Gross receipts taxes are widely considered to be among the most economically destructive and complex of taxes. While they have low rates and no deductions, the perniciousness of gross receipts taxes is that since the tax applies each time a business sells its goods or services, the tax "pyramids" on products as they move through the production process. The longer the production chain, the higher the effective tax rate on the final product. This produces major distortions in economic decision-making, with notably negative impacts on low-margin, high-volume businesses.

To mitigate this, lobbyists push jurisdictions with gross receipts taxes to adopt different rates for different industries, a process ripe for confusion and abuse. Washington State, for instance, has repeatedly amended its gross receipts tax (“B&O tax”), resulting in an ever-changing blizzard of different rates and bases. Every business is assigned a B&O tax classification with different rates, exemptions and credits. For example, manufacturing generally pays 0.484 percent, while airplane components manufacturing pays 0.2904 percent, with timber extraction paying 0.3424 percent, retailing paying 0.471 percent, real estate paying 1.5 percent, horse race meets paying 0.13 percent, travel agents paying 0.275 percent, garbage disposal paying 3.3 percent, and crabbing paying zero.

San Francisco’s ordinance already starts down this road, setting seven different tax rates by industry. For example, retailers would pay just 0.16 percent, while construction would pay 0.45 percent.

No matter how much one fiddles with the rate structure, all gross receipts taxes feature tax pyramiding, which distorts and interferes with business investment decisions. Sales, individual income and property taxes do not have the same tax pyramiding feature, and cause far less economic harm than a gross receipts tax that raises the same amount of revenue.

There is no sensible case for gross receipts taxation. Their historical ancestor, turnover taxes, have long since been replaced with taxes that created fewer economic problems. Gross receipts taxes do not belong in any program of tax reform.

More on the destructive nature of gross receipts taxes here, and more on their history here.

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