Gross Receipts Tax - part 2

While a few states are discussing (or using) a gross receipts tax - usually instead of a corporate income tax, it has its flaws. A response to my first gross receipts tax blog entry came from the Tax Foundation, noting 2 helpful reports they have issued on the topic.

I want to spend more time on a few of the flaws they note (which I agree with):

1. The unfairness of not considering the different net margins and types of business that exist - if a business is in a very competitive market (whether temporarily or always), they will be paying tax at a rate equal to a business that may have much more leeway in its pricing model. In contrast, if the tax were based on NET income, the realities of doing business for all types of businesses are reflected in the tax base.

2. Pyramiding of the tax - if a business gets most of its supplies from other businesses, the gross receipts tax of those businesses is most likely embedded in the price. If a business instead manufactures most of the materials it needs (is more vertically integrated), it will most likely end up paying (indirectly) less gross receipts tax. This pyramiding effect is difficult to remove with a gross receipts tax. In contrast, it can be removed if a sales tax is used because that tax can just be assessed upon the final purchaser of goods. That is, businesses would never pay sales tax, but would collect it on the goods and services they sell to customers. A VAT would have the same effect - the pyramiding (or cascading effect) of the tax would not exist. [NOTE - Please don't be shocked by a statement such as "businesses would never pay the tax." This isn't a tax break, it is the reality that businesses don't pay tax - individuals do in the form or prices, reduced wages, reduced profits, etc.]

But, despite the flaws, there can be some benefits to a gross receipts, such as simplicity and the ability to remove out-of-state sales from the base. It might also be a quick-fix reform effort if it generates more revenue than the corporate income tax; but it may not be the best long-term solution.

Tax reform isn't easy!!

Here is the link to the Tax Foundation paper on the history and performance of the gross receipts tax:
http://www.taxfoundation.org/publications/show/2180 (brief)
http://www.taxfoundation.org/files/bp53.pdf (full text)

I'm sure I'll come back to the gross receipts tax at some point in the future since it is on the table for a few states, but there are other timely topics as well:

1. Using taxes to reduce climate change and address other envirnonmental concerns (Congress is discussing this and states will be too if they have CO2 emission reduction targets) and it might also be a way to generate revenue or to reduce rates on other state taxes.

2. Reviewing tax expenditures (the cost of tax deductions, credits and exemptions) in order to find revenue to address key state issues of health care and education.

More later! Thanks for reading.