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”.


Russell said...

I am beginning to think that the devil is in the details of the Gross Receipts Plan.

When I look at the details, it appears to me that the small business exemption is not really an exemption.

Here is what is stated on the Illinois Governor's web site, which provides the link to this "taxtales" blog.

"The CIT will be eliminated after a four-year phase-out period. During this period, businesses with $2 million or more in sales will pay the GRT, while those under $2 million in sales will pay the Corporate Income Tax. Before the CIT is phased out, the administration will work with small businesses so they can choose which form of taxation they wish to be subject to in four years."

Small business is not exempted from tax. Small business is exempted for 4 years from the GRT. The small business still pays the corporate income tax. But the CIT will be gone after 4 years. After 4 years, then what? My guess is that after 4 years every business is subject to the GRT.

I have called the Office of the Governor twice about this. No answer yet. No one I talked to was familiar with this statement on the web site. No one I talked to had any idea what might happen in 4 years.

It seems that only Mr. Bob Greenlee of the Governor's office might have the answer to this question. If not Bob Greenlee, who else might have the answer in the Governor's office? My phone calls uncovered no one with the knowledge.

Here is another interesting point that no one in the Governor's office can answer. The Governor's web site states that "imports will be subject to the GRT".

I ask, are imports from outside the USA or just outside Illinois? No one seems to have that answer. Not anyone I talked to in the Governor's office, not my local state representative, not my local state senator, not the Illinois Chamber of Commerce, etc.

I have a small business that has survived in Illinois for 25 years with no property tax relief, no government small business loans, etc. No government help, no friends or relatives with deep pockets. Taking a look at 25 years of financial history and presuming a gross receipts tax, I would be out of business now. I have re-mortgaged the house twice, used retirement and insurance savings, etc., to keep it all going. All that personal risk would be for nothing with the added burden of the GRT. So much for encouraging the success of new, small, high tech businesses.

At this point the business is debt free but not rich. Very middle of the middle class. Too middle class to afford the high priced Chicago suburbs. Without any help from huge multinational corporations to lobby against the GRT or to inform or misinform me, I find the gross receipts tax to be a very bad deal based on my real life small business. The GRT would be a small business killer.

There is no way the State of Illinois will eliminate the corporate income tax on a permanent basis and then exempt businesses with less than $2 million in sales from the GRT or a similar tax. Not when from day one a business with sales of less than $2 million must still pay the corporate income tax. There is no intent to "exempt" the small business. Just an intent to lessen the burden for those 4 years (maybe).

Here is another interesting thing about the $2 million dollar exemption. It is not an exemption from paying the GRT or the CIT. It is the intent of the state to make the small business pay the corporate tax for the next 4 years on a yet to be defined phase out basis. When sales reach the magic $2 million, suddenly the business pays zero corporate tax, and is fully subject to the GRT.

Here is a question for Doug Kane that I hope is not considered impertinent. I ask the question in search of full disclosure. This "taxtales" blog was started in March, 2007. This blog is linked from this State of Illinois government web site:

Doug Kane has a business called Program Analysis, Inc. Is the State of Illinois a business client of Program Analysis, Inc? Is this blog a "paid by the State of Illinois" effort? If not, why the intense concern about the GRT issue from a resident of Alma, Wisconsin? I would think that the inner workings of the State of Wisconsin and the State of Minnesota (just across the river) would be of greater interest to a resident of Alma.

I am disclosing my economic interest. I think it is obvious. I have a small business in Central Illinois that may see its tax bill triple if the GRT becomes law.

Russ Straayer

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