by Greg Blankenship
Lot's of stuff on the Gross Receipts tax today. PJStar.com business editor Paul Gordon notes that business groups are circling the wagon:
"If the leaks were meant to let the governor's office test the waters on how it would be received, it will have no doubts about how hot that water will be.
"This would be a bad, bad tax. It's the kind of anti-business policy that sends up the wrong kind of signal - a signal that investing in business is costly in Illinois," said Doug Whitley, president of the Illinois State Chamber of Commerce. "It would affect every large manufacturer and every small business in the state and drive some of them right out of business."
"This would be the absolute death knell to manufacturing in Illinois," said Greg Baise, president of the Illinois Manufacturers Association.
Strong words for what still is speculation. The governor's office hasn't discussed it. But Whitley and Baise both said signs indicate Blagojevich will propose a Gross Receipts Tax in a couple weeks.
"I think he will have a very difficult time selling this. He'll have a fight on his hands if he proposes this," said Whitley, whose organization adopted a position paper opposing the tax way back on Dec. 8, when it became clear the GRT proposal was at least a strong possibility.
That paper has been circulated to local chambers of commerce, with the state group hoping they will join the fight to oppose GRTs.
Jim McConoughey, president of the Peoria Area Chamber of Commerce, said he intends to make that recommendation to his board. "Right now, my board hasn't seen it and I haven't been able to discuss it with them. But speaking for myself, I believe this would be a very unpopular tax and one that business should oppose," he said."
I think Greg Baise gets to the core of the issue -- that businesses will have incentives to flee Illinois:
"Business pays about 51 percent of the services in Illinois. And of the state's $560 billion GDP, about $70 billion of that is manufacturing. We shouldn't start tinkering with that large of a component when it can move someplace where it can do business for less," Baise said.
One correction, however, 51 percent of taxes are passed through businesses on to consumers in the form of higher prices for goods and services, fewer jobs and lower pay. it's not a matter of either business pays or individuals pay. It's individuals who in the end pick up the entire tab. Business isn't a special interest it's something in which we all have a stake. I hope our business leaders more aggressively push that line of thinking during the Spring Session.
Next, comes Joe Calimino in the SJ-R. He gets it:
"Many people think that gross receipts taxes only affect big business, but this is false. The gross receipts tax is not just a tax hike, it’s also a price hike, and implementing it would harm consumers and companies alike.
Gross receipts taxes (GRT) are imposed on the receipts of each and every business transaction. This includes intermediary and business-to-business exchanges. It’s very different from a corporate income tax, which is only levied on profits, or a sales tax, which is only levied on final sales.
Because every stage of production from soup to nuts is hit by the GRT, layers upon layers of taxes are embedded in the final cost of goods - an effect economists call “tax pyramiding.” The result is that what might start out as a low statutory tax rate grows or “pyramids” into an even larger effective tax rate because GRTs get embedded along every stage of production. By the time products hit the shelves, the effective tax rate imposed by a GRT can be as much a 250 percent of the statutory rate.
If this sounds hard to believe, look at Washington, the state with the oldest GRT. Studies have found the effective tax rate is 18.6 percent on groceries, 7.4 percent in restaurants and 10 percent on utilities. This means that if you spend $100 every two weeks on groceries, $18.60 is taxes. Over the course of the year, that works out to $446 in GRT paid on groceries alone.
Consumers who think that these taxes will be absorbed by grocers or other businesses should think again. All taxes on businesses, in the end, are just taxes on individuals. The business owner himself pays some of the taxes, and the rest of the taxes are passed onto consumers in the form of higher prices."
Finally, Douglas Kane weighs in on the opposite side. He's trying to sell the notion that business likes this idea:
"The gross receipts tax has the broadest possible base, and the lowest possible rate. Unless there are specific deductions or exclusions, a gross receipts tax is a tax levied on the total gross receipts of a business and applies to all businesses.
It is simple, easy to calculate, very stable and productive, and grows with the economy. It reflects the underlying economy and doesn’t discriminate among types of businesses.
The major problem with many existing taxes is that they are not tied to the underlying economy, such as Illinois’ Corporate Income Tax. This tax is tied primarily to businesses that don’t represent the lion’s share of economic activity in Illinois today, such as the goods producing sector. This has caused rates to increase on businesses in this sector. At the same time, businesses that do represent the lion’s share of economic activity in Illinois, such as the services sector (“new economy” businesses) are escaping taxation.
This is the major reason why in the last three years, Ohio, Texas and Kentucky have all adopted some form of a gross receipts tax, and states like Washington, Delaware and Hawaii have had one for years.
Too few businesses were paying rates that were too high, while others were getting a free ride.
For these states economies to remain competitive and to avert budget crises, their tax bases had to be broadened, rates lowered and tax burdens shared more equitably across all business sectors.
The Texas Tax Reform Commission, appointed by a Republican governor and made up almost entirely of business executives concluded that all businesses that “benefit from Texas’ resources and services must pay their share” and not paying taxes is a “competitive detriment” to those businesses that do contribute. That’s why Texas adopted a gross receipts tax.
Last fall, the Ohio Business Roundtable also published a report that stated, “unlike the old business taxes, this new (gross receipts) tax does not penalize job creation and investment, and also encourages participation in the global marketplace.” That’s why Ohio’s business community embraced a gross receipts tax."
He is about as disingenous as you can get. The tax is assessed at a low rate, but everything is taxed. This "economics PhD" is trying to sell you the idea that if you nickel and dime your way to a $13 billion tax hike that $13 billion won't be sapped from the economy. Next, he says that the tax is more stable. It isn't any more stable or unstable than the income or sales tax. If you have economic down turn you are going to have less economic activity. Less economic activity means fewer transactions. Since you have fewer transactions there be less opportunities to levy the tax -- voila ... lower revenues.
The whopper, though, is that businesses support the tax and that Ohio instance supports that. I spoke with the Buckeye Institute's President, David Hansen, who informed me that the Business Roundtable in Ohio is dominated by financial groups that would not be effected by a GRT. The Ohio Chamber of Commerce was against it. The Ohio manufactures only grudgingly accepted the tax in exchange for ending the even more hated business property tax on machines and equipment. They were basically squeezed into making a deal with the devil.
And let me drive a point home about businesses leaving the state. In the Ohio example, Indiana and Ohio were competing for a new Honda plant. After the GRT was passed, Honda chose Indiana. While they still have plants in Ohio, it made more sense to move the plant 40 miles to the west along the same interstate. I'm not saying the GRT was the only factor -- but I'm sure it was a factor.
Cross posted @ Spontaneous Solutions.
