April 23, 2007

Illinois: More Editorial Opposition to Gross Receipts Tax

In a Sunday editorial, the folks at the Belleville News Democrat give the thumbs down to Governor Rod Blagojevich's proposal to introduce a "gross receipts tax" to help pay for property tax cuts. The main reason? The board asserts (correctly, in my view) that the gross receipts tax would ultimately fall hardest on low-income families, not on the big and profitable corporations that Blagojevich claims to be targeting. The Democrat cites with approval the words of state representative Tom Holbrook, who rejects outright the view that the GRT won't affect families:
"John Q. Public doesn't see it as a tax increase," Holbrook said. "They're going to pay it, but they won't see it."
Darn right. And the editorial offers a quite straightforward explanation of why this is true:
Another problem that Holbrook and other opponents point out is the tax's pyramiding effect. For instance, a state real estate group commissioned a study that calculated the added cost on a new home would be 2.84 percent. That figures out to $8,853 extra in the Chicago area, where the average price of a new home is $311,734.
Why 2.84 percent if the proposed tax is 1.95 percent on services and .85 on construction contracts and materials? Pyramiding. The tax would be applied at each step of the process: wholesaler, subcontractor, general contractor, developer and consumer.
A higher sales price means a bigger down payment, higher mortgage payments, and higher property taxes. In other words, more pyramiding.
Now think about all the products and services you buy, and you get a sense of how costly this proposal will be if it's enacted.
Sales taxes on businesses are ultimately, in general, paid not by businesses but by consumers, in the form of higher prices. This is part of the reason why policymakers usually try hard (as they should) to ensure that the sales tax applies only to retail consumption by individuals, not businesses: consumption should be taxed once, visibly, rather than multiple times, invisibly. Blagojevich's GRT proposal is best understood as a sales tax that is actually designed to be as invisible as possible. He obviously thinks this makes good politics-- but it certainly doesn't make for good policy. At the end of the day, the money from the GRT will be coming out of Illinois consumers' pockets-- they just won't know it.


At 8:34 AM, Anonymous Anonymous said...

I have a different take on consumption taxes, generally, and how a tax on a corporation ends up being paid by the consumer.

Imagine, for a moment, if all taxes were paid by corporations, and just passed on to consumers.

That would mean no tax forms, no IRS for federal income or payroll taxes, just for corporations.

Corporations are already far better suited to filling out the required forms in the first place, since their owners/shareholders are interested in this information already.

If the costs of my good and services rise 30%, but my federal income and payroll taxes drop 30%, I am better off because I am no longer filling out 1040s or worrying about late payments, or (which so many people do) making interest free loans to the government all year.

The lowest impact taxes are the estate and sales tax. People never know they pay the estate tax, unless my understanding of the post-mortem condition is flawed.

Skipping business-to-business transactions in sales tax collection creates a large incentive to create buying clubs, where organized citizens can avoid the tax altogether by forming a corporation.

I understand European countries are quite fond of their VAT taxes, which sound to me to be about the same thing.

I'm not saying I like the idea of 1.95% on services and .85% on construction contracts and materials. I'd have to see the whole table of rates, first, and even then I wouldn't be quite sure where they got those particular numbers.



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