Tuesday, February 27, 2007

Retrogression in Taxes 

Filed As:  Budget and Tax

A tax should be fair, easy to understand, and not be prone to boom-and-bust cycles. So why is the gross receipts tax making a comeback in the states?

The gross receipts tax (GRT) goes by various names. In its various forms, the tax is applied to a businesses' revenue rather than its profits. It may look like a standard sales tax, but its effects are far more serious.

From Kentucky, the Bluegrass Institute for Public Policy Solutions says that "The most damaging aspect of the [alternative minimum calculation] is the fact that it forces businesses to pay taxes based on gross receipts--not profits. Even if a company loses money, it still must write a check to state bureaucrats in Frankfort."

One problem with such a tax: it encourages businesses to make purchases from out-of-state suppliers, who are not subject to the tax.

The Illinois Policy Institute, meanwhile, says that Illinois spenders are looking at starting a gross receipts tax. With personal sales and income tax increases having been ruled out, the tax would be a politically popular way to siphon up to $13 billion out of the economy, to fund "universal" health care.

The institute's Greg Blankenship argues that "the tax is hidden, unfair, and overly-complicated. Furthermore, the GRT is no more stable than any other tax. So, revenue during a recession will suffer just as income and sales taxes suffer. Less economic activity means fewer transactions to tax and that means lower revenues."

The Rio Grande Foundation says that New Mexico's GRT is among the most burdensome in the country, and points out that it leads to rent seeking, or the currying of political favor, a waste of effort that should be spent on actually going business.

Michigan, the only state to have lost jobs last year, suffers under the "single business tax," or SBT. A few years ago, the state stated to zero out the tax, though on a very long schedule. With the governor looking for new tax money, some people want to replace the tax with some other tax. The Mackinac Center tells lawmakers and anyone else How to Replace the SBT with Nothing.

The Tax Foundation, finally, says that GRT s are making a comeback in the state, after having been discarded. It concludes "there is no sensible case for gross receipts taxation."

So why are gross receipts taxes coming back? I can think of several reasons. One, their effects are not obvious to voters. Two, they are on "the other guy." Three, they are are on those "rich guys" who own a business. And finally, bringing them back is easier than the alternative, which is bringing state spending into line with sustainable revenues.

• posted by John LaPlante
• 8:42 am
• 0 comment