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Monday, May 21, 2007

Gross Receipts Tax

While California does NOT have a gross receipts tax, I'd like to talk about this type of tax because it has received some attention in a few other states in the past few years and very recently in Illinois. (Ohio adopted one in 2005.) If a state is to look at overall improvements to its tax system, it is a tax that should not be omitted from the discussions, particularly to use to replace one or more existing taxes.

A gross receipts tax is imposed on business revenues (gross receipts) in contrast to the traditional income tax which is based on "taxable income." Generally the rate on a gross receipts tax will be much less than for an income tax because the tax base will be higher (for example, taxable income could be negative, but receipts would not be). One advantage then that should immediately come to mind for a gross receipts tax is that it should be simpler than an income tax. Businesses would not have to calculate net income, but instead would just measure their gross receipts (which they already do with an income tax). But, it sounds unfair in that the tax would be owed even if the business doesn't make a profit. BUT - consider:

a. Simple? While simpler than a net income tax, if some gross receipts are exempt (such as those from sales out-of-state), it might be difficult to identify where some sales occurred (particularly virtual ones).

b. Hurtful to unprofitable businesses? A business generating losses already owes other taxes, such as property, payroll and perhaps sales tax. Like other taxes, the gross receipts tax would need to be included as a cost of doing business and if a business can't cover that cost, its business model likely needs review.

Other observations regarding a gross receipts tax:
i. A tax with a broad base (few deductions and exemptions) and low rate is often viewed as more fair, administrable and simple.

ii. In some ways, one might view a gross receipts as looking like a sales tax which is passed onto buyers. However, like a sales tax, depending on the market situation at the time of sale, the seller may not be able to adjust prices to completely cover it. Also, the base will not be the same as the sales tax. A sales tax is paid by buyers residing in the state. It can't be equivalently replaced with a gross receipts tax (even one that exempts sales outside of the state), because a sales tax also has a use tax whereby resident buyers self-assess sales tax on purchases they make from out-of-state sellers. Some argue that a gross receipts tax is like a sales tax resulting in unfairness to low-income consumers. However, even part of an income tax would be passed onto individuals. After all, businesses really don't pay taxes (in effect) - individuals do (in the form of taxpayers, workers, owners and customers).

iii. A state-level gross receipts tax does not match the federal income tax. However, gross receipts must be measured to calculate federal taxable income and the adjustments needed to likely exempt some gross receipts (such as for sales to out-of-state customers) are already tracked for other tax purposes.

What's happening in Illinois? Governor Blagojevich proposed a gross receipts tax as part of a broader tax reform effort tied to generating more tax revenues to address state challenges such as health care (called the Tax Fairness Plan). The new tax would replace the corporate income tax. On 5/10/07, a day after the governor asked the Illinois legislator to informally vote on his plan, the legislatures voted it down.

Why does Blagojevich think a gross receipts tax is a way to improve the Illinois tax system? In a 5/9/07 press release, he stated: "Illinois’ tax structure is one of the most regressive and unfair to working families in the nation. Even though large corporations enjoy the benefit of state services such as education, healthcare, roads, public safety and public transportation, individual taxpayers carry 88% of the burden of paying for them – despite the fact that corporations are posting record profits."

The Illinois governor has a website (and blog!) about the Tax Fairness Plan.

(Topic for another day - the need to have a great name for a tax proposal. Really - who would want to be against the Tax Fairness Plan? That was probably a tough "no" vote by the Illinois legislators although it was more of an informational vote.)

The Illinois proposal exempts businesses with less than $1 million in Illinois gross receipts from the tax. While this may seem like an unfair tax break for small businesses, this is a decision between simplicity, administrative convenience (for Illinois tax collectors) and the reality that not much is collected from small businesses. However, the Governor's plan does note that after the corporate tax is phased out, consideration will be given to the appropriate tax for small businesses.

Add'l comments:
1. I'll bring this topic up again in future entries because it is a good example of the challenges of state tax reform.

2. The governor has a video on YouTube (!)

3. Here are two groups against the Illinois gross receipts tax proposal:

4. Info from a group that supports the proposal:

What do you think?

1 comment:

Anonymous said...

Professor Nellen:

I would urge you to take a look at 2 recent studies we published on gross receipts taxes:

Professor Due also did a lot of great research on GRTs (relied on by both studies linked above) but I have not read him extensively.

By the way, I love the topic of this blog.

Chris Atkins
Senior Tax Counsel
Tax Foundation
Washington, D.C.