In the midst of the Great Depression, state and local economies were hit hard. Because of deep recession, property and income tax collection suffered greatly, leading to fiscal crises in many states. With lawmakers yearning for a source of stable tax revenue, the state of Washington enacted this country’s second statewide ‘gross receipts’ tax.
A gross receipts tax is a tax on the gross receipts of any business subject to the tax, regardless of profit or loss, a fact which I find particularly egregious. In gross receipts systems all business transactions are taxed with few exceptions. Law firms, accounting firms, medical partnerships, retailers and restaurants, just to name a few, are subject to a tax that otherwise does not exist.
The impact this tax had on the economies of those states that enacted it was devastating. Although it was initially a good revenue stream, many unwanted side effects were created. Because of the additional tax, a system of tax pyramiding was created. Many states were forced to repeal their gross receipts taxes because they were found to be unconstitutional or simply did not create the revenue stream that states desired. Most states had repealed this tax by the mid-1970s, and no state enacted a new gross receipts tax in the entire second half of the twentieth century.
Tax pyramiding is the accumulation or compounding of the tax as it is applied to parts that go into a final product. First a company will be faced with a 0.5 – 1.8 percent tax off the top. But the price of parts from suppliers will also be marked up to reflect the tax each of the suppliers had to pay and are passing on. This could then be an effective 3 to 5 percent new tax on manufactured products made in Illinois.
I strongly believe the proponents of a gross receipts tax, led by Governor Blagojevich, are oblivious to the fact that businesses do not have bottomless profit margins. They fail to account for the number of businesses this tax will drive out of our state—permanently damaging our state’s tax base and the local tax base of the communities in which they reside. When that happens, the state will never receive the projected new revenue from the tax and will also lose the income taxes the business and their employees are paying under the current system.
Since 2001, interest in gross receipts taxes began to resurge as states again struggled with more federal resources being directed to Homeland Security. Less naive this time around, states carved out exemptions for proposed gross receipts systems to exempt their pet industry groups, but they will again have long-fought and expensively litigated constitutional issues.
One of the leading constitutional issues is the unfairness of taxing businesses on money that is not net income. Low-margin, high-volume businesses will suffer catastrophically if this tax is implemented in Illinois.
I believe that enactment of a gross receipts tax in Illinois will chase more employers out of Illinois, just like the radical increases in worker’s compensation and unemployment compensation enacted in 1974. Our state still suffers economically from these flawed policies enacted over 30 years ago.
As Illinois considers a gross receipts tax to pay for the governor’s healthcare proposal, we must remember the failed history of such taxes in the past. We must consider the detrimental effect this tax had on the economies of states like Washington and New Mexico. Tax pyramiding will place Illinois business at a further competitive disadvantage to surrounding states.
Universal healthcare is an admirable goal and a timely issue, as more Illinoisans cannot afford health coverage. But for the state to dole out coverage without a reliable revenue source is not fair to citizens. Not to mention the state’s outstanding debt to current healthcare providers and the delayed payment schedule to those providers. This will be a fatal blow to many businesses in Illinois.
I intend to be a leading advocate against the implementation of a gross receipts tax in Illinois. The answer to providing better access to healthcare, increased state funding of education and other priorities is to enact policies which foster income growth. Only a growing economy will enable Illinois to sustain funding of vital needs. Enactment of a gross receipts tax in Illinois would push Illinois in the wrong direction at warp speed. IBI