Thursday, May 17, 2007

There Are Still Long Term Revenue Problems to Fix

The Problems:

1) Because the economy has changed and the Illinois tax structure has not, we run into continual budget crises. Our taxes tend to fall on the manufacturing and retail goods sectors that are declining relative to the whole economy. Tax rates on those sectors are too high and revenue does not keep pace with budget requirements, while the expanding service, financial and information sectors largely escape the existing taxes.

2) The corporate income tax is no longer a tax that can be effectively collected by state revenue departments. Multi-national corporations have become so large and their financial inter-relationships so complicated that it is virtually impossible to monitor the allocation of income to individual states.

David Brunori writes in his 2005 “State Tax Policy”, published by the Urban Institute:

The percentage of total state tax revenue collected from levies on corporate income has declined steadily for more than two decades. … More important, in every year since 1959, the corporate tax base has failed to keep pace with company profits, either worldwide or domestic. In other words, in relative terms, state governments are collecting less in corporate income taxes while corporations are earning more.

Robert Tannenwald, an economist with the Federal Reserve Bank of Boston, writes:

“Multi-jurisdictional entities are so thoroughly integrated that formulas designed to allocate their income geographically are in large part arbitrary and therefore controversial.”

3) The result over time has been a shift in tax burden away from business onto individuals as the response to these changes by state policy makers has been to increase individual income taxes.

Tannenwald’s study showed that between 1986 and 2000 the ratio of state corporation income taxes collected to corporate income decreased by almost 50 percent, while the ratio of state and local personal taxes and charges to personal income increased by 25 percent.

The Solutions:

1) The Governor suggested a gross receipts tax to address all three of the above long term structural problems, make the tax system fairer, and put the state on a sound fiscal basis moving into the future.

2) The only other alternative that has been suggested, SB/HB 750, does not address problems 1 and 2, and makes problem 3 worse.

Monday, May 7, 2007

Who’s Spinning a Tax Tale?

It is interesting how the opponents of the gross receipts tax have shifted the argument once their first charges proved to be untenable.

Remember the salvos? The GRT will be “devastating to Illinois employers.” “The tax has hurt the economy in every state where it has been implemented.” “It drives businesses out of state.”

We pointed out that there is no evidence to support those charges. Of the three states that have had gross receipts taxes for a long time, Washington, Hawaii and Delaware, the economies in two, Washington and Delaware, have, over the past 20 years, grown faster than the national economies.

And the business leaders in Ohio and Texas supported the gross receipts tax because the existing tax structure no longer fit with the underlying economy. The Ohio Business Roundtable said, “This new tax does not penalize job creation and investment, and also encourages participation in the global marketplace.” The Texas Economic Development Council called the gross receipts tax, “a fair business tax that closes loopholes and provides improvements to the funding for education.”

So we got past the first hurdle. The tax by itself does not devastate the economy.

Now some say we are spinning our tale because we have pointed to Texas and Ohio as examples of states that have recently passed gross receipts taxes. And they explain away the absence of any negative effect from Washington’s gross receipts tax by attributing that state’s economic success to either not having an income tax, or having no competition since it is bordered only by the Pacific, Canada, Oregon and Idaho.

They should just accept the fact that there is no credible evidence that a state gross receipts tax causes the economic sky to fall.

There are a number of legitimate questions. Is the gross receipts tax an appropriate tax to use? Is the overall size of the tax increase reasonable? Will the proposed expenditures be beneficial? Let’s just be clear about which question is being addressed.

Eight states, Washington, Delaware, Hawaii, Kentucky, Texas, Ohio, New Mexico and Arizona, have some form of a gross receipts tax. New Hampshire has a Value Added Tax. All are different, with different rates, different bases, different exemptions. The rest of the tax structure in each of the states is also substantially different. None of that has ever been the issue.

I stand by the arguments I have consistently made.

1) There is no evidence that the gross receipts tax is “devastating” to business.

2) The three states that have recently enacted a gross receipts tax did so largely because existing business taxes did not extend to significant sectors of the economy, and in the cases of Texas and Ohio did so with the support of business groups.

3) In today’s economy, the gross receipts tax is a better option for Illinois than any of the proposed alternatives.

4) Illinois is historically a low tax state, and if the Governor’s proposal is enacted, Illinois will still be in the bottom half of all states in state and local revenues (taxes, fees and interest) collected per $1000 of personal income, and below all but one of our neighboring states.

Thursday, May 3, 2007

Logic is Not a Prerequisite

I was listening this past week to objections being raised against the gross receipts tax. Two jumped out, mostly because they came from the same person and followed one right after the other.

The first: the gross receipts tax is not related to profitability and will hurt businesses with small profit margins.

The second: we know that it is going to get passed on, just like all other taxes, to consumers and is going to hurt low income families.

I wanted to interrupt, “Choose one … but you can’t have both.”

If profit margins are cut, consumers won’t be affected.

If the tax is passed on to consumers, profit margins won’t be affected.

But logic has never been a necessary ingredient in political discourse.

What do economists know about what happens to taxes on business? Very little really. As William Oakland of Tulane University, and William Testa, vice president of the Federal Reserve Bank in Chicago, wrote in the May, 2000, issue of Economic Development Quarterly, “The actual incidence of business taxes remains unknown …”

There have been lots of studies, but the results depend largely on the assumptions made at the beginning as to how businesses respond to various taxes. It may be that it is this underlying uncertainty that makes the contradictory assertions about the gross receipts tax both believable.

The broad base, the low rate, and the simplicity are the strengths of the gross receipts tax. Because it applies to all economic sectors, the rate can be low. The lower the rate, the more easily it can be incorporated into the cost of doing business. Because the tax affects all economic activity and not just the production of tangible goods, if it is passed on, it is passed on to a much broader range of consumers than those now affected by the sales tax.

The gross receipts tax is better than alternatives that have been suggested to raise the same revenue. Doubling the individual and corporate income taxes would do little to spread the burden of taxes to those who now don’t pay and would simply make those who are paying now, just pay more. Broadening the sales tax to include consumer services would be far more regressive than a gross receipts tax.

Monday, April 30, 2007

12 Reasons Why the GRT Won’t Drive Business Out of Illinois

The total bite from taxes and fees in Illinois will still be lower than half of the other states. We have the lowest burden of all of our surrounding states, and with the GRT will have the second lowest burden.

Affordable health insurance coverage will make Illinois a more attractive place to live, work and run a business.

Health insurance costs to businesses will be reduced.

With the State assuming a larger role in the funding of schools, the pressures to increase property taxes will be reduced.

The economy of the state of Washington, which has had a GRT for many years at rates similar to those proposed in Illinois, consistently out performs the national economy.

Job growth in Washington last year increased 60 percent faster than in the country as a whole.

The GRT spreads the tax burden more evenly across all business sectors, reducing the upward tax pressure on businesses that pay existing taxes.

The three states that have had a GRT for a number of years, Delaware, Washington and Hawaii, are ranked respectively 9th, 11th, and 24th by the Tax Foundation in its 2007 State Business Tax Climate Index.

In a Washington State Survey, only 8 percent of businesses said that the state’s tax system “had a negative effect on the ability to conduct business.”

A year after the GRT went into effect in Ohio, the Ohio Business Roundtable said, “Unlike the old business taxes, this new tax does not penalize job creation and investment, and also encourages participation in the global marketplace.”

The Texas Association of Manufacturers endorsed the adoption of a GRT in that state, calling the GRT, “a more broad-based, low rate tax structure that is reasonable and taps into the diverse business economy of Texas – ensuring that all businesses do their part in funding education for the future workforce of our state.”

There is no evidence that business is leaving Washington, Delaware, Hawaii, Ohio, Texas, Kentucky, New Mexico, or Arizona, all states that have some form of a gross receipts tax.

Thursday, April 26, 2007

Games With Numbers

One of the wonderful things about numbers is the games you can play with them. They can be presented in so many different ways that you can tell just about any story you want to and find numbers to back it up.

This is particularly true about percentages. Going from 2 to 4 is a 100% increase. Going from 2 to 6 is a 200% increase. Going from 4 to 6 is only a 50% increase. And going from 6 back to 4 is a 33% decrease. The game is simple. If you want a large percentage to make your point, find a low number to start your comparison. If you want a small percentage to make your point, find a high number. And you don’t have to make up any numbers.

Which brings us to the gross receipts tax that has been called the largest percentage tax increase in any state in the last 10 years.

That is probably true, but true because Illinois starts from a base that is lower than 46 of the other 49 states.

Illinois is a low state when it comes to public expenditures. The latest available data from the Census and the Bureau of Economic Analysis (FY 2004) shows that total state and local government “general revenue from own sources” (which includes taxes, fees and interest, etc.,) in Illinois comes to $14.20 per $100 of personal income, well below $16.08 the mid point of all the states.

If the gross receipts tax is passed, total taxes will increase approximately $1.41 per $100 of personal income, bringing Illinois to $15.71, still in the bottom half of all the states, and below all of our neighboring states except Missouri.

If one is looking at “tax burdens” it is the total in taxes and fees that are paid that makes Illinois more or less competitive with other states. It will be the total that is factored into costs, not just one tax, or two taxes. When all taxes and fees are taken into consideration, even with adoption of the gross receipts tax, Illinois will be competitive.

And what the money will be spent on, an improved education system and universal health care coverage, will make Illinois more attractive as a place to live, to work, and to run a business.

Monday, April 23, 2007

Rambling Thoughts About Business Reaction to the GRT

As the opposition witness slips from business groups representing every sector of the Illinois economy were being read off at the Senate Committee hearing on the GRT last week, the thought crossed my mind, “This is the strength of the GRT. Because it is so broad and hits everybody, the rate can be low. Everybody pays a little bit and the burden is spread out.”

If an alternative tax is passed, pity the business sectors that aren’t able to scramble their way out of being hit with that tax, because the rate of any alternative will be much higher than the GRT. Each business sector shouldn’t be thinking how bad the GRT is, but how much worse an alternative might be when they are one of the few sectors being taxed.

In putting out their analysis this week of the economic effects of the GRT, the Realtors used the same assumptions as the Tax Foundation, every business that is part of the production chain passes the entire tax on. Nothing else changes for any business that is not at the end of the line. Then they point to the last business in line and say, wow, look at how much that business is paying! In the Tax Foundation example, one small firm ends up paying the entire tax for 30 larger firms. Not likely!

Of course, we could just tax the last business in line. It is called a sales tax. To match the revenue from the GRT, the state sales tax would have to be raised from 5% to nearly 11%, which would make the combined state and local sales tax rate in Cook County 15.75%. Haven’t heard anyone promoting that plan!

I was in the State of Washington in February. Looked around. Didn’t seem to be any businesses missing! The supermarkets were fantastic. Retail, wholesale, manufacturing, banking, lawyers, all seemed to be present and accounted for.

Costco Wholesale, Microsoft, Washington Mutual, Weyerhaeuser, Paccar,, Nordstrom, Starbucks, Safeco, and Expeditors, all growing their way into the Fortune 500 and all prospering. The Boeing manufacturing plants are still there. The Washington gross receipts tax, in place since 1935, didn’t seem to be chasing anybody away, or causing much of a problem. Jobs in Washington last year grew 62% faster than the national average.

Don’t know how the Tax Foundation explains this one after all the bad things they have said about the Governor’s proposal. Hawaii has had a gross receipts tax (no sales tax) for 30 odd years and also has a relatively high personal income tax and very low property taxes. In commenting on Hawaii’s tax structure in its 2007 report on state business tax climates, the Tax Foundation wrote, “Hawaii’s overall rank, 24th best, would be much higher if the state could reform its individual income tax without causing damage elsewhere in what is otherwise a good tax system.” Most of the “otherwise” part is a gross receipts tax.

My good friend Tom Johnson, of the Taxpayers Federation, twice this week at public forums quoted an article saying only 16% of state services benefit business, and wanted to know if it was fair to ask business to pay more than 16% of the taxes. I read the article and looked at how the author allocated benefits. I would ask Tom these questions: Does business really get no benefit at all from our community colleges or universities? Would a business locate in a state with no schools? Does business benefit from the state paying the heath care costs of low wage workers that don’t get health benefits from work? How much would highway costs go down if there were only cars and no fully loaded 18-wheelers pounding the concrete?

Probably the most useful thing I have learned in 30 years as a professional economist: if you want to understand the numbers that come out at the end of a study, look at the assumptions made at the beginning of the study.

Thursday, April 12, 2007

Be Wary of New Friends

It is somewhat amusing to listen to groups representing multi-national corporations attack the gross receipts tax because it will hurt small businesses, discourage individual entrepreneurs, and be paid eventually by working families.

It reminds me of the debate on the inheritance tax when I was a member of the House of Representatives. My memory may not have the numbers exactly right but the argument being made against the tax went something like this: widows who didn’t know how they were going to pay for their next meal needed protection from a tax that exempted the first $650,000.

It is kind of the big guys to be so protective of the little guys, but one wonders what the facts are. Here are some to keep in mind.

The purpose of Governor Blagovejich’s proposal is to reduce the reliance of schools on the property tax and to extend health care coverage to working families that aren’t being covered by their employers and can’t afford to pay for it out of their wages. Without new revenue those goals will not be achieved.

Without question, the property tax is the most difficult tax for new and small businesses to pay.

Under any set of assumptions, working families will pay a smaller share of the gross receipts tax than any other alternative proposal that is being made.

The broad base and the low rate of the gross receipts tax, compared to other taxes, means that it will be spread more evenly and more fairly across all business sectors. The gross receipts tax is also simple and straightforward so it is not as subject to accounting manipulations as the corporate income tax, and is more difficult for multi-national corporations to avoid.

The Tax Foundation, out of Washington, DC, and aligned with big business, has expressed grave concern over the Illinois gross receipts tax. It has a marvelous example of a “hypothetical” small manufacturing company that somehow has its profits reduced by $10,000 as a result of the gross receipts tax even though it is too small to be subject to the tax. It seems that this small company has 30 suppliers all of whom are large enough to be subject to the tax, but none of whom pay any of the tax. Neither the sales or the profits of the 30 large companies are reduced by the tax, because they all pass the tax on to the one small company at the end of the production chain that ends up in the “hypothetical” example paying the tax for all 31 companies.

The small company is put out front like the poor widow, both to divert our attention and draw our sympathy. But even in the Tax Foundation’s fictional account the one small company has a problem only because 30 large companies pass all their tax liabilities onto its narrow shoulders. How real is that “example”? We are supposed to believe that 30 companies large enough to be subject to the tax, don’t pay anything, while one small company, small enough to be exempt from the tax, has to pay the tax for all of them.

Everyone should have a friend like the Tax Foundation looking out for them!

What are the alternatives to the gross receipts tax being suggested by those who want to protect working families? A 5 percent tax on among other things, hair cuts, funerals, doing the laundry, and home repairs, and an increase in the personal income tax from 3% to 5%. Somehow those taxes are “better” for working families than the gross receipts tax.

Be wary of new “friends”.

Thursday, April 5, 2007

The "Regressive" Gross Receipts Tax and Its Alternatives

One of the arguments being made against the gross receipts tax is that it is regressive – that is, the tax will fall disproportionately more heavily on people with lower incomes.

The argument has several forms. Business groups simply say the tax will just be passed on in higher prices, and consumers will take the hit. More academically minded, liberal groups like the Center for Tax and Budget Accountability and the Institute on Taxation and Economic Policy say that the gross receipts tax is another form of a sales tax; sales taxes are by their nature regressive; therefore the gross receipts tax is bad; consumers will take the hit.

The analysis is far too simplistic.

The first question that needs to be asked is: Regressive compared to what?

Even assuming, for sake of the argument, that the gross receipts tax is completely passed on to consumers, how regressive is it? Will it take a larger percentage of income out of the pockets of the poor, than the pockets of the rich?

The regressivity of any tax that falls on consumption depends on the particular items subject to the tax and how those items fit into the budgets of families at different income levels.

For example, a consumption tax that falls on food and clothing is more regressive than a consumption tax that falls on laptop computers which in turn is more regressive than a consumption tax that falls on tickets to the opera. How regressive a consumption tax is depends, not on the nature of the tax, but on the nature of the items covered. Not all consumption taxes are equal.

A sales tax that falls only on tangible goods, like our current Illinois sales tax, is more regressive than a sales tax that also covers services purchased by consumers. Which is why many have argued, like the Center for Tax and Budget Accountability, that the sales tax should be broadened. The addition of consumer services will not make the sales tax progressive, it will simply make it less regressive than it is now.

I make the same argument for the gross receipts tax. Because it falls on all economic activity, it will – even if completely passed on – include all consumption, making it less regressive than any sales tax.

The incidence of a tax that falls on all consumption will be similar in effect to a flat rate income tax – except at the highest income levels – because most people at every income level spend all their incomes.

(To whatever extent a gross receipts tax is not passed on to consumers in higher prices, the regressivity will be reduced – because some of the tax will be borne by the owners of capital.)

So, a gross receipts tax is less regressive than any sales tax, is similar in incidence to a flat rate income tax, but would be more regressive than a progressive income tax.

Which brings us to the second question: what are the alternatives being suggested by those who are attacking the gross receipts tax as being regressive, and therefore harmful to working families?

Bingo. You guessed it. They want to extend the 5 % state sales tax to cover consumer services, like haircuts, laundry, and funerals, and they want to increase the flat rate income tax that falls directly on individuals. How they can with straight faces say that a 5% sales tax on haircuts hurts the poor less than a 1.95% gross receipts tax on lawyers’ fees is something I haven’t yet figured out.

The Institute on Taxation and Economic Policy avoids making any hard choices by suggesting that Illinois go to a graduated income tax and exempt food from the sales tax. It is probably unfair of me to point out that the Illinois constitution forbids a graduated income tax and food is already exempt from the sales tax. Imaginary solutions are always easier to propose. No one takes them seriously.

In the real world where actual budgets are made, the gross receipts tax is a better option than the alternatives.

Tuesday, April 3, 2007

Facts and Damn Facts

The Center for Tax and Budget Accountability (CTBA) has put out a “Fact Sheet” on the Gross Receipts Tax.

Here are some additional facts to consider.

CTBA Fact: “Research shows that new firms pay a much higher effective tax rate than established firms, no matter what the industry.” The Washington State Tax Structure Study Report is cited as the source.

Additional Fact: Analyzing 10 different sectors, the Washington study found that the average difference in effective tax rates between new and established firms within a sector from all state business taxes was 0.69 percent. The property tax accounted for 92 percent of the difference, while the gross receipts tax accounted for only 7 percent of the difference. The average mean difference in effective gross receipts tax rates within a sector between new and established firms was only 0.05 percent, or five hundredths of one percent of gross revenue – hardly “much higher”.

CTBA Fact: “Experts also acknowledge that GRTs do not treat all taxpayers equally.”

Additional Fact: No tax treats all taxpayers equally.

CTBA Fact: “GRTs are regressive for business.”

Additional Fact: The Washington State study found that the property tax was far more regressive for businesses than the GRT – in the neighborhood of 10 times more regressive.

CTBA Fact: GRTs are regressive for consumers, because business might pass on the tax to the final purchaser.

Additional Fact: The CTBA would rather tax the consumer directly by increasing the personal income tax and adding a 5% sales tax to haircuts, laundry, and funerals.

CTBA Fact: Research finds that tax pyramiding leads to tax evasion since businesses use strategies to avoid the tax. (Again, the Washington study is cited as the source.)

Additional Facts: The Washington study cited several examples of tax avoidance but avoidance was not described as a major problem. Only 8 percent of businesses in Washington say the tax system has “a negative effect on the ability to conduct business.”

Tax avoidance has been described as a major problem with the corporate income tax. Robert Tannenwald, Assistant Vice President of the Federal Reserve Bank in Boston, notes that since 1980 the ratio of state corporate income tax collections to corporate income has declined almost 50 percent and state tax departments are “increasingly outgunned” in collecting the corporate income tax. In large part, Ohio, Texas and Kentucky have adopted gross receipts taxes in recent years because their corporate income taxes were no longer effective in an economy characterized by globalization.

CTBA Fact: The GRT is not “transparent” because consumers don’t know how much of the price of the product they buy went to pay the company’s gross receipts tax.

Additional Fact: The customer also doesn’t know how much went to pay for the company’s corporate income, property, utility, social security, or unemployment taxes.

CTBA Fact: The GRT is not related to a company’s profit.

Additional Fact: Neither is any other tax (property, net worth, severance, utility, gasoline, social security, unemployment, worker’s compensation, etc.,) except the corporate income tax. The gross receipts tax does have the advantage that many other taxes do not; it is tied to a stream of revenue from which the tax can be paid.

Friday, March 30, 2007

Does a "Good Business Tax Climate" Make the Economy Grow?

We have been told so often over the past several decades that a state has to have a good business tax climate in order for its economy to grow, that we have begun to accept it as the truth.

Economists have generally agreed on the characteristics of a “good” tax -- simple, productive, neutral, fair, transparent – but a “good business tax climate” has come to mean something additional in the political jargon of today – low, or no, taxes on business.

The promise is held before us: the lower your taxes, the healthier your business climate, the more your economy will grow. States are lured into competing against each other to see which can have the “best” business tax climate. Fear is generated that any tax increase will scare business away. Business funded entities construct “Indexes” so each state can see whether it is winning or losing in the competition for economic growth.

There is one small problem, however. The Indexes are never linked to actual economic growth. They measure the level of taxes and then leave us with only the promise of growth.

The Tax Foundation’s “2007 State Business Tax Climate Index” is typical. The report claims that the states with the “best tax systems” will be the “most competitive” in attracting new businesses and “most effective” at generating economic and employment growth. The only way to get a perfect score from the Tax Foundation is to have no tax at all. “Clearly a zero rate is the lowest possible rate and the most neutral base, since it creates the most favorable tax climate for economic growth.”

Is the Tax Foundation’s promise real? Do the states with the “best” business tax climates actually lead in the race for the Golden Fleece of business growth and prosperity?

Economists have argued the point using sophisticated models and arcane statistical manipulations. But let us do something more simple: compare the Tax Foundation state business tax climate ratings with the latest average annual (1997-2004) growth rates in state gross product reported by the U.S. Department of Commerce, Bureau of Economic Analysis.

Here is what one finds.

New Hampshire, one of the 10 best tax climate states, and its next door neighbor, Vermont, one of the 10 worst tax climate states, have identical average annual growth rates.

California, one of the 10 worst tax states, has a higher annual average growth rate than its neighbor Oregon, which is one of the 10 best states.

New York, one of the 10 worst tax states, has a higher annual average growth rate than Delaware, one of the 10 best states, which in turn has a higher annual average growth rate than New Jersey, that is, along with New York, one of the 10 worst states.

Wyoming and Montana, both among the 10 best tax states, rank last and next to last in growth rate among the Rocky Mountain states.

The two states with the highest average annual growth rates, Arizona and Idaho, both rank in the bottom half of all states when it comes to their “business tax climates”.

Texas, which ranks in the top 10 tax climate states, has a 40% slower average annual growth rate than its neighbor, Arizona, which ranks 28th in tax climate.

And lastly, Illinois, which ranks 25th in “business tax climate” according to the Tax Foundation, has a slower average annual growth rate than Wisconsin, which ranks 38th in tax climate, which in turn is growing slower than Minnesota which is 41st in tax climate and one of the 10 “worst” when it comes to business tax climate.

One can only conclude that business has not being paying a lot of practical attention to the Tax Foundation’s Business Tax Climate Index. There is something besides tax levels that attracts business and fosters growth and development. Competing in a race to the bottom in taxes is not necessarily a winning strategy.

Robert Tannenwald, vice-president of the Federal Reserve Bank in Boston, may have a point when he suggests that states might make their economies better by enhancing public services valued by business.

Perhaps the overall business climate improves when states compete not to have the lowest taxes, but the best schools, the best community colleges, the best universities, the most rational health care, the lowest crime rate, the cleanest environment, the best transportation network.

Low taxes are not the only ingredient to a healthy, vibrant economy.

Thursday, March 29, 2007

Where is the Evidence?

There has been a lot of wailing and gnashing of teeth since Governor Blagojevich proposed a gross receipts tax to pay for education and health care. To hear the business community tell it, the tax will turn Illinois into an economic wasteland as business flees the state.

Is there any evidence to support these predictions? Is this just Chicken Little scurrying around trying to persuade all who will listen that the sky is falling? Or is it, as Kristen McQueary suggests in her Daily Southtown column, the noise of those who see their lucrative tax breaks and loopholes disappearing?,291MCQ1.article

There is no evidence that supports the predictions of economic doom.

Three states, Washington, Hawaii and Delaware, have had gross receipts taxes for some years. Over the past 20 years, the economies of two of those states, Washington and Delaware, have out performed the national economy.

The Tax Foundation, that friend of business, ranks the business tax climate of all three states in the top half of all the states, with Delaware 9th, Washington 11th, and Hawaii 24th.

Ohio, Texas and Kentucky all adopted gross receipts taxes in the last two years. Nevada fell one legislative vote short in 2003. This year Governor Blagojevich and Governor Granholm in Michigan have both proposed gross receipts taxes for their states.

What’s going on here? Why does a gross receipts tax make sense to so many different people in so many different states? Is it just that all the politicians have completely lost their senses as the Illinois Chamber of Commerce and other groups would have us believe? Or is there some basic economic reason why a gross receipts tax at the state level is something reasonable to consider in today’s economy?

The answer to the last question is, “Yes”.

Over the last 40 years the economy has changed fundamentally. Our taxes have not; they are still tied to the old economy. The corporate income tax, full of loopholes, can no longer be enforced by states. Businesses representing the old economy are increasingly paying more than their share.

As the Texas Comptroller said 20 years ago, “There are whole industries today – enormously important and profitable industries – that weren’t even dreamed of twenty-five years ago. The new economy has been described by many names: service, information, space age, diversified. But our tax structure remains tied to the past, to hard products and assets attached to the ground.”

Robert Tannenwald, Assistant Vice President of the Federal Reserve Bank in Boston, notes that since 1980 the ratio of state corporate income tax collections to corporate income has declined almost 50 percent and state tax departments are “increasingly outgunned” in collecting the corporate income tax. Globalization, as well as tax breaks, plays a part. Richard Pomp, a corporate tax law professor at the University of Connecticut, predicts the tax at the state level has little future.

The issues of avoidance and fairness have been the motives in every state for adopting the gross receipts tax.

The Texas Tax Reform Commission, appointed by a Republican governor and made up mostly of business executives, perhaps said it best in recommending a gross receipts tax for that state, “The tax system must provide a level playing field that is essential for healthy, free market competition. … Those who benefit from Texas’ resources and services must pay their share. … The tax system must reflect the realities of a rapidly evolving economy. Texas must be the most competitive state in the nation when it comes to building or moving a business here, risking capital, and winning in a global economy. … Designing a broad and stable tax base that encourages job creation and investment was the Commission’s goal.”

Adoption of the gross receipts tax has not been accompanied by economic disaster.

A study by Ernst and Young done for the Ohio Business Roundtable projected that the 2005 tax changes will create 78,500 new jobs and inject an additional $6.3 billion in new capital investment into Ohio’s economy.

The Ohio Business Roundtable commenting on the gross receipts tax a year after its adoption, said, “Unlike the old business taxes, this new tax does not penalize job creation and investment, and also encourages participation in the global marketplace.”

The Texas Association of Manufacturers endorsed the gross receipts tax, saying it “goes far in maintaining the kind of business climate that made Texas a national stand-out.” The Texas Economic Development Council called it a “fair business tax that closes loopholes and provides improvements to the funding for education.”

There is no evidence the sky will fall.