Having begun to move away from gross receipts taxes (GRT) in 2005, New Mexico lawmakers are considering reinstating the tax on groceries in an effort to close the state’s budget shortfall. The tax, projected to generate $200 million for the state if reinstated, has proven unpopular in the past and hindered the state’s economic growth compared to its neighbors.
A gross receipts tax is a tax on all business sales of any business subject to it, regardless of the firm’s profits or losses. Unlike corporate income taxes and sales taxes, gross receipts taxes apply to all transactions, including intermediate business-to-business purchases of supplies, raw materials, and equipment. This creates “tax pyramiding,” the layering of taxes at each stage of production. The result is higher costs to consumers, who often have no idea how much tax they ultimately pay for their purchases. That violates the good-government principle of transparency.
A GRT on food would be particularly regressive, hitting the state’s poorest citizens the hardest, because so much of their spending goes toward basics such as food. In response to such concerns, New Mexico lifted the GRT from food staples in 2005. Reinstating the GRT on foodstuffs during a recession is particularly ill-advised. The tax likely would suppress economic activity, raise prices for consumers, and cause many businesses to leave the state.
The following articles examine gross receipts taxes and the experiences of states that have adopted them. We hope this information helps explain why the recent renewed interest in gross receipts taxes is so worrisome to economists, businesspeople, and consumers who believe in keeping taxes low, non-distorting, and transparent.
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Research & Commentary: Gross Receipts Taxes
http://heartland.org/policybot/results/20724/
This Heartland Institute Research & Commentary examines the effects of gross receipts taxes on businesses and shows their regressive effect on consumers.
Tax Pyramiding: The Economic Consequences of Gross Receipts Taxes
http://www.taxfoundation.org/research/show/2061.html
This study by the Tax Foundation explains why gross receipts taxes are poor tax policy. The author notes that GRTs lead to harmful “tax pyramiding,” distort companies’ structures, and damage the performance of state and local economies.
New Mexico’s Harmful Gross Receipts Tax: A Warning to Other States
http://heartland.org/policybot/results/20655/
This report by Paul J. Gessing and Harry Messenheimer of the Rio Grande Foundation discusses New Mexico’s experience with gross receipts taxes, using it as a cautionary tale for other states.
Tax Policy Briefing: Why Does New Mexico’s Economy Underperform Compared to its Neighbors?
http://heartland.org/policybot/results/10729/
This Tax Policy Briefing by Harry Messenheimer of the Rio Grande Foundation compares New Mexico’s economy to those of its neighbors, focusing on the GRT’s effect on the state’s economy.
Testimony on a Plan to Implement a Gross Receipts Tax in Illinois
http://heartland.org/policybot/results/21200/
This testimony before the Illinois General Assembly by Trevor Martin, former director of government relations at The Heartland Institute, describes several of the failings of a GRT and its negative effects on business.
Truthy Claims About Gross Receipts Taxes
http://heartland.org/policybot/results/20798/
This article by the Tax Foundation examines several fallacies in claims made in support of a gross receipts tax.
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Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartland Institute’s Web site at http://heartland.org and PolicyBot, Heartland’s free online research database.
If you have any questions about this issue or The Heartland Institute, you may contact Legislative Specialist John Nothdurft at [email protected] 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
