Why Liberals and Conservatives Should Reject Blagojevich Tax Plan

March 20, 2007

Gerald Prante

Gerald Prante

David Brunori, a professor of public policy at George Washington University and a columnist for State Tax Notes, wrote a piece today explaining why both liberals and conservatives should oppose gross receipts taxes. Here’s an excerpt:

The other idea that keeps coming up is adoption of a gross receipts tax. Texas and Ohio went down that road recently. There’s a proposal in Michigan to use a gross receipts tax to replace the single business tax. And now Illinois Gov. Rod Blagojevich (D) wants a new gross receipts tax to raise $6 billion in revenue. He would like to eventually replace the corporate income tax with a gross receipts tax. Everyone should beware of that idea. Conservatives should know that the gross receipts tax is a license to print money. The new tax would raise a lot more than the $1.5 billion now raised by the corporate income tax. Liberals should know that a lot of that tax burden would fall not on the wealthy, but on everyone else.

Gross receipts taxes are terrible ways to raise revenue. One of their biggest problems is that they are hidden taxes. No one who bears the burden is aware of it. That alone should be reason to reject gross receipts taxes. I hope this is not the start of a bad trend. (Full Text)

Brunori is right. Despite the populist “go after business” rhetoric politicians like Blagojevich and his spokespersons may use, there is no getting around the fact that gross receipts taxes disproportionately hit the poor, in a similar fashion to retail sales taxes. And any unbiased economist, liberal or conservative, will tell you that.

For more on the issue of gross receipts taxes and Governor Blagojevich’s plan, check out these recent Tax Foundation publications and comments on the issue:

Governor Blagojevich’s Gross Receipts Tax Plan Represents Largest State Tax Increase This Decade

Tax Pyramiding: The Economic Consequences of Gross Receipts Taxes

Gross Receipts Taxes in State Government Finances: A Review of Their History and Performance

Governor Blagojevich: Meet Economics 101

Gross Receipts Tax: Wrong Way to Finance Illinois Government

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A 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.

A gross receipts tax is a tax 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.

A 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.

A 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.