A Publication of WTVP

The Illinois Farm Bureau joins Illinois business groups who oppose the proposed gross receipts tax (GRT) on businesses. The GRT proposal was announced during the Governor’s State of the State Address in Springfield on March 7. According to Governor Rod Blagojevich, the GRT is estimated to generate $6 billion annually. The proposed GRT would include a 0.5 percent levy on the transactions of goods and a 1.8 percent levy on service firms.

What is a Gross Receipts Tax?
A GRT is a tax on all income received by a business without any deductions for costs of doing business. Accordingly, GRTs are not based on ability to pay, but are owed whether or not a business is profitable. This would be particularly tough on marginal or startup companies. A higher percentage of their available cash would go to paying taxes and less would be available to grow their business through investment in equipment or new hires. Businesses operating at a loss would still owe the full amount of the GRT and the loss could not be offset against income in the future.

The Impact
The outcome of a GRT will also depend, in part, on the profit margin of a particular business. A business with lower profit margins will experience a higher effective tax rate and will be more adversely affected by a GRT. This is especially true in the agriculture sector, as farms can often produce a significant revenue stream but, at the same time, very narrow profit margins. A gross receipts tax will make Illinois products and services less competitive. A production process—which involves six steps from the procurement of raw materials to the final sale to the consumer—provides the best example of how a GRT pyramids. If each step were performed by a separate legal entity in a state with a GRT, the final product would be subjected to six levels of GRT.

The Agricultural Perspective
Let’s put this into perspective from the agriculture community’s point of view. A farmer would pay a GRT on inputs, such as fertilizer, seed, crop protectants and fuel. A feed mill would pay the tax when it buys the farmer’s grain. A cattleman would pay the tax when he buys feed from the mill for his livestock. A meat processor would pay the tax when he buys the cattleman’s cattle. A meat wholesaler would pay the tax on the meat he buys from the processor. A grocery store pays a GRT on the meat bought from the wholesaler.

In conclusion, a GRT operates as a hidden tax since the effect of pyramiding is to tax each level of production. It will raise the cost of goods sold at each production level and will ultimately raise the retail selling price of products. IBI