Gross Receipts Tax Slammed Before Illinois Lawmakers

Published July 1, 2007

On May 9 the Illinois House of Representatives convened a rare “Committee of the Whole” meeting to discuss a proposal by Gov. Rod Blagojevich (D) to raise taxes more than $8 billion, most of it through a tax on business gross receipts. The governor’s proposed tax hike would be three times larger than the next-largest tax increase in any state in the past decade and possibly the largest state tax increase ever, according to the Washington, DC-based Tax Foundation.

Trevor R. Martin, director of government relations at The Heartland Institute, testified before the lawmakers. Here are his remarks.

Mr. Speaker, Chairman Bradley, thank you for allowing me the opportunity to appear before you today.

The Heartland Institute is a 23-year-old nonprofit research and education organization based in Chicago. My testimony is based on research conducted by The Heartland Institute in its mission to discover, develop, and promote free-market solutions to social and economic problems. The opinions in this testimony are my own.

This panel representing distinguished organizations from across Illinois has been invited to spend time today speaking about a tax plan that will take more than $8 billion from businesses, and ultimately from families and consumers. The plan includes a gross receipts tax and is being put forth by Governor Blagojevich.

Spending Is Culprit

Before detailing why the plan is such a bad idea, I feel the need to mention what motivates ideas like this–it’s increased spending. If it weren’t for existing commitments, not to mention huge new spending proposals, there would be no talk of raising taxes by billions of dollars. Universal preschool, socialized health care, subsidized prescription drugs–the list of unfunded promises keeps getting added to, while the state can barely manage its existing obligations.

Now I’ll briefly discuss the governor’s gross receipts tax proposal.

Gross receipts taxes apply to all transactions, including business-to-business purchases of supplies, raw materials, and equipment. Under other corporate tax systems, these expenses can be deducted–but not under a gross receipts tax system. A gross receipts tax is simply a tax on doing business–not on profits, but just on doing business.

So Illinois will become a state that taxes business simply for the privilege of locating within the state. Is this the image we want to project?

Applying the tax to all transactions creates what is known as “tax pyramiding,” or the layering of taxes at each stage of production, which results in higher costs and hidden taxes.

Workers, Consumers Share Burden

Don’t get me wrong. I am not here to defend “big business.” I’m not even here to defend “little business.” But I am here to defend the state’s workers and consumers.

Gross receipts taxes get passed along to consumers and workers because businesses end up charging their customers more, or reducing workers’ wages and benefits, or hiring fewer workers, or laying off existing workers, or doing a combination of these things.

I am especially here to defend low- and middle-income families in Illinois, because they would pay the highest percentage of their income in gross receipts taxes–taxes they have no way to calculate because they are hidden, buried in the final price of goods and services they buy.

Yes, businesses suffer heavily from this pyramid effect as well. Manufacturers that buy component parts from outside suppliers would be at a disadvantage compared to companies that make their own parts or to companies based in states without a gross receipts tax. Furthermore, firms with low margins–like start-ups, small retailers, and restaurants–pay a far higher effective tax rate than do firms with high profit margins.

Because the tax applies to gross receipts, not net, even a firm that loses money must pay it. Two firms in the same town can end up paying radically different effective tax rates, depending on profit margins.

New Spending Untenable

The gross receipts tax is unfair, and the governor’s tax plan is not the right approach to restoring fiscal stability in Illinois. A “new tax,” a “tax swap,” or tinkering with tax rates will not solve our state’s fundamental problem: uncontrolled spending.

Nearly everyone has recognized the problem, including Governor Blagojevich himself when he famously accused you, Illinois lawmakers, of spending money like “drunken sailors.”

The governor wants additional revenue for more spending proposals and more promises–and to get there, he is asking you to support his proposal to implement a fundamentally unfair and regressive tax system. It’s time for everyone, including the governor, to sober up.

Trevor R. Martin ([email protected]) is director of government relations for The Heartland Institute.