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.