Would a Gross Receipts Tax Stabilize Michigan Revenue Collections?

June 4, 2007

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 tax 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 tax 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

Washington Business and Occupations Tax Base

Washington Retail Sales Tax Base

Oregon Adjusted Gross Income

Oregon Corporate Income Tax Revenues

Annual Change (mean)





Standard Deviation





Highest Change





Lowest Change





Correlation with B&O base





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 tax to be the most stable, then the gross receipts tax, which was followed closely by the individual income tax, and finally the corporate 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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