Only months after being re-elected to another four-year term, Governor Rod Blagojevich unveiled a proposal for the largest tax increase in the history of Illinois. His $7 billion tax will pay for a massive and expensive universal health care program for Illinois.
In his budget address, the Governor made scapegoats out of big corporations, accusing them of not “paying their fair share.” He said the gross receipts tax would ferret out those big corporations that have used “tax loopholes” to avoid the corporate income tax and force them to pay for the services the state provides.
However, the Governor really only told a small part of the economic story, the part that allows him to sell his massive tax hike. In reality, there are lots of legitimate reasons companies don’t pay income tax: re-investment in the company, no profit was made or the company had financial losses. There are other taxes businesses pay: property taxes, unemployment insurance taxes, sales tax, payroll taxes, social security taxes and more. And, don’t forget that these big businesses also employ thousands of Illinois residents, in most cases providing good paying jobs with benefits.
But that part of the story is inconvenient, so the Governor used his speech to target big business to boldly proclaim that he doesn’t want the middle class to pay even one more dime then they already do in taxes. It sounds noble, especially if you are not one of the big businesses.
Unfortunately this facade is what makes the Governor’s proposal so wrong. The middle class, perhaps even more so the poorest of the poor, will be hurt by the gross receipts tax. The problem with the gross receipts tax is that it is embedded throughout the production process. The very small businesses will still feel the impact of the gross receipts tax in the products they purchase. So will the consumer. The majority of this tax will hit small and medium-sized businesses and consumers a lot more than big business.
Gross receipts are not profits nor are they indicative of income. Gross receipts are all sales of a company before any type of business expense is deducted, such as payroll or the cost of health insurance. The Governor is proposing a sliding scale gross receipts tax for Illinois businesses. Manufacturers, retailers and wholesalers will pay 0.5 percent of gross receipts while the service industry will pay 1.8 percent. For those businesses that have under $1 million in gross receipts, the tax will not be imposed at the point of sale.
The Governor also proposes phasing out the corporate income tax. However, most small and medium-sized businesses currently pay the personal income tax due to how they are structured. The ironic part is that small businesses will pay both the gross receipts tax and the personal income tax while big business will pay the gross receipts tax but eventually not pay any type of income tax. How is that for tax fairness?
Because the tax is based on total revenues without regard for any business expenses or deductions, a business would be responsible for the tax even when they don’t turn a profit. Businesses that are high volume but low profit will get punished. Grocery stores are a good example. While the Governor has exempted food and drugs at the final point of sale, the cost to produce a gallon of milk or a loaf of bread will go up due to the tax during production. That cost will be reflected in the price of most consumer goods.
A gross receipts tax will also make products made in Illinois more costly. An effect called pyramiding occurs with a gross receipts tax. Pyramiding means that the tax occurs every time a product exchanges hands and value is added. For example, a raw material is sold to a manufacturer (transaction is taxed), manufacturer adds value and sells product to a wholesaler (transaction is taxed), wholesaler adds value and sells to the retailer (transaction is taxed) and the retailer adds value and sells to the consumer (transaction is taxed). So the end product has multiple layers of taxation which adds to its cost.
At the end of the day while many businesses will be forced to absorb some of this tax, the consumer will pay most of it in the increased cost of products. As one business owner put it, you can’t take $7 billion out of the state’s economy and not have a negative impact. Governor, it’s simply Economics 101. tpw
Kim Clarke Maisch is the Illinois State Director for the National Federation of Independent Business (NFIB). The NFIB is the largest small business advocacy organization in the nation with 350,000 members nationwide.