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, Amazon.com, 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.

1 comment:

ahern said...

Mr. Kane is nearly alone among economists in cheerleading for Gov. Blagojevich's gross receipts tax plan. See Tax Foundation economist Andrew Chamberlain's recent blog on how economists generally are reacting:
"Economists Agree: Gross Receipts Taxes Belong in the Dustbin of Tax History" at www.taxfoundation.org/blog/show/22360.html.
Mr. Kane's comparison of Illinois's tax system to Washington State's prompted me to blog on what a bad comparison that was:
"Illinois Economic Consultant Continues Misguided Campaign for Gross Receipts Tax" at
www.taxfoundation.org/blog/show/22362.html

--Bill Ahern
Tax Foundation