Supporters of Illinois Governor Blagojevich’s gross receipts tax have floated claims that have an air of “truthiness” about them. Here we analyze a number of those claims:
Truthy Claim: Gross Receipt Taxes (GRT) are low rate taxes.
Maybe. There is nothing inherent about gross receipts taxes that make their rates low. The statutory rates are set based on the revenue lawmakers want to raise. If enacted, the proposed statutory rate in Illinois would be the highest GRT rate in the country.
Truthy Claim: A GRT’s broad base is more economically sound than other tax bases.
Wrong. Though a broader tax base is generally preferable to a narrow one, the GRT base is economically irrational. In many cases, the GRT base can exceed the state’s entire final economic output. Broad coverage of a reasonable base, not broad coverage alone, is the proper standard. If broad coverage alone were the standard, a tax on grains of sand, blades of grass, or people named Smith would make the most sense.
Truthy Claim: A GRT does not discriminate.
Flat out false. GRTs heavily discriminate based on business structure. The effective tax rate for a business depends on nature of the industry and the length of the production chain. This discrimination gives companies an artificial incentive to vertically integrate, take on responsibilities that make production less efficient, or seek to avoid the tax.
Truthy Claim: GRTs closes corporate loopholes.
False. There is nothing about a GRT structure that prevents lawmakers from writing loopholes into the law. Indeed, even the Illinois Governor’s own GRT plan already includes some loopholes, special rates, exemptions, etc. Corporate loopholes can be closed without imposing a gross receipts tax.
Truthy Claim: GRT is a “new” tax.
Only if Leonardo da Vinci is considered a “new” artist! GRTs date back to the thirteenth century in Europe. They first reared their ugly head in the U.S. by the mid-1800s.
Truthy Claim: GRTs work in other states.
If by “work” you mean create a host of complex problems that have to be addressed year after year, then sure. Washington State has had a GRT since 1933 and they are routinely heading back to the drawing board. Research indicates that GRTs do not appear to contribute to the overall stability of a state tax system.
Truthy Claim: GRTs grow with the economy.
So does every other tax. This is like using “wetness” to compare tap water to bottled water.
Truthy Claim: GRTs are sound tax policy.
Actually, they are one of the worst tax systems ever created. GRTs are irrationally broad; create effective tax rates that vary depending on the industry; show no effect on revenue stability; distort the market through “pyramiding”; make businesses less competitive; and hide the true cost of the tax from the individuals who pay it.
Chris Atkins is staff attorney (http://www.taxfoundation.org/staff/show/4.html) and Brian Phillips (http://www.taxfoundation.org/staff/show/101.html) is manager of media relations for the Tax Foundation. This essay was published on March 14, 2007 as a Tax Foundation Commentary and is available online at http://www.taxfoundation.org/press/show/2261.html.