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Expert calls proposed gross receipts tax textbook case of 'inefficient tax'
Mark Reutter,
Business & Law Editor
217-333-0568; mreutter@illinois.edu
|
Released
4/13/2007
CHAMPAIGN, Ill. — The
gross receipts tax proposed by Illinois Gov. Rod Blagojevich, while
a welcome step in tackling the state’s
budget shortfall, is a flawed approach to taxation, according to a
University of Illinois expert.
The proposed tax, which would be levied on transactions between businesses
and between businesses and consumers, is a textbook case of an “inefficient
tax” that penalizes smaller businesses that depend on outside
vendors, J. Fred Giertz, a professor of economics and
in the Institute
of Government and Public Affairs, wrote in the newsletter State
Tax Notes.
“A small firm would have to pay taxes on its payments to lawyers, accountants
and janitorial services, while a large firm that provides for these activities
in-house would escape the tax,” Giertz wrote.
At the same time, by exempting firms with $2 million or less in yearly
sales, the plan would create “equity problems,” according
to the Illinois tax expert.
He gives the example of a lawn-care company employing 40 low-wage workers
that would be subject to the gross receipts tax if its annual sales
exceeded $2 million, but a four-partner law firm with annual receipts
of $7.9 million could escape the tax by becoming four independent practitioners
sharing an office.
A gross receipts tax would especially hurt Illinois businesses whose
purchases and production are in-state. These companies would be subject
to “pyramiding effects” as the tax is imposed “on
the same input again and again through the production process.” By
contrast, an out-of-state vendor selling into Illinois would only have
to pay the gross receipts tax once – at the final sale.
Giertz confirmed
that Illinois does have a significant fiscal problem. “For
the last five years, continuing state revenue sources have failed to
cover expanding state spending.” Gov. Blagojevich and the state
legislature have repeatedly used short-term fixes, such as selling
off state assets and underfunding state pensions, to balance the budget.
“Illinois is now facing a structural deficit problem of several billion
dollars,” Giertz noted. “It cannot pay all its current obligations
with continuing revenues, and revenue growth in the future will likely not
keep pace with expenditure needs because of the relative unresponsiveness of
the state’s tax system,” Giertz explained.
Overhauling the current tax system would make better sense than resorting
to an untried and uncertain new tax, Giertz wrote.
“A modest rate increase in the income tax (individual and corporate),
accompanied by an increase in the exemption level to protect low-income taxpayers
and the expansion of the sales tax base to include consumer services, would
generate sufficient funds for the state to address its fiscal imbalance if
the extra funds were accompanied by spending discipline,” the Illinois
scholar concluded.
