The GRT is a really dumb idea according to the Institute on Taxation and Economic Policy
They testified at the hearings
This is a Terrible, Horrible, No Good, Very Bad tax.
From the ITEP report and echoing what I wrote the other day:
GRTs are not sensitive to a business’s ability to pay. Businesses that fail to turn a profit would still face a GRT; businesses that are engaged in high-volume, low-profit-margin activities would be adversely affected as well. Conversely, businesses with very high profit margins could pay lower taxes under a GRT than under a corporate income tax.
But just as important:
GRTs lead to severe pyramiding problems. Since a GRT applies not just to retail sales, but to all stages of the production process, it may be levied on itself multiple times. For instance, the GRT paid on the raw materials going into a particular product will later be subject to GRT when the finished product is sold to a wholesaler. One examination of Washington’s gross receipts tax found that it pyramids 2.5 times on average.
And this is especially problematic when you think about the economies in depressed communities and neighborhoods. It won’t matter much to Walmarts, but the local shop owners who are often the provider of basic goods in many poor neighborhoods almost always go through distributors and other middlemen to get their products meaning the impact of the tax is felt by those ultimate purchasers in the community and neighborhoods and large out of state retailers are benefited by the GRT at the expense of small, local businesses.
“large out of state retailers are benefited by the GRT at the expense of small, local businesses”
This is incorrect. I would say that the GRT actually impacts those out of state more – since they are the ones who are able to get away with paying nothing.
I think the biggest impact this will have is on those companies that are based out of state but sell to people in Illinois. They can hide their income (and have been), but not their sales.
Additionally, when you take healthcare into the calculation – that is something that actually affects a businesses’ bottom line. You cannot exclude that when making calculations on how it will affect them.
A businesses with 20 employees that can save $50,000 per year on their health insurance costs isn’t going to give a damn about $5,000 in taxes.
===This is incorrect. I would say that the GRT actually impacts those out of state more – since they are the ones who are able to get away with paying nothing.
No, there is only one transaction for them with the tax in place. So if they are selling pork from Iowa, the only tax is upon the sale in Illinois. If, however, we are talking about pork raised here, slaughtered here, processed here, goes to a distributor here, is then sold to a market here and then sold to a consumer in Illinois the tax is payed 5 times. That’s the point of the pyramid structure of the tax. Out of state companies are advantaged because they don’t have the same costs of the tax if the pork is all, but sold to the consumer elsewhere.
[…] A commenter left a comment that was thoughtful, but I’d argue wrong on the GRT post: “large out of state retailers are benefited by the GRT at the expense of small, local businesses” […]
Lets be honest:
If 5 different companies are making profits of the production of a good why shouldn’t they all pay taxes? The current structure of sales tax and profit taxes create the same “pyramid” effect.
Are you suggesting the only one company should profit from the production of a good? That is the only logical conclusion from the “pyramid” argument.
The biggest problem in this county is that Working families pay a vast majority of taxes in this country. Even thought corporations touch every dollar that is spent or made.
At least 35 of the top 100 companies in Illinois pay lass in taxes than the average family.
Whether you call it stealth, pyramid, double, or whatever adjective one can put in front of the word tax Business is not paying it and working people are getting screwed!
===If 5 different companies are making profits of the production of a good why shouldn’t they all pay taxes? The current structure of sales tax and profit taxes create the same “pyramid” effect.
They should. I don’t say they shouldn’t. I said that a GRT hits consumers hard because it has a pyramid structure to it that specifically hits the product being sold. It’s a regressive tax and it isn’t neutral in its impacts to business. It hits high volume low margin businesses and people who use them the har
dest–the poor. Grocery stores and drug stores often fit exactly this description.
And in the specific example it should be clear. A product shipped in from out of state by Walmart is taxed once–the sale to the consumer. However, if a product is made and sold in Illinois, it’s taxed as many times as it changes hands. If you sell corn as a similar example to the above, the farmer is taxed (most are incorporated somehow these days), the elevator is taxed, the processing plant is taxed, the distributor is taxed and the retail sales place is taxed. Yet a product from Iowa if processed and only shipped into a store of a multistate store is taxed once.
Business income taxes are targeted towards the profit–so a low margin high volume business is taxed upon its profit, not upon its sales. If it loses money, it doesn’t pay. That has a very different kind of impact for marginal businesses, new businesses, or those going through tough times.
Sales tax is regressive–just as is the GRT. The people hurt the most are people who spend their income on necessities and not things like services that aren’t taxed or otherwise.
===At least 35 of the top 100 companies in Illinois pay lass in taxes than the average family.
This is, of course, an argument for change, not an argument that the GRT is better than other alternatives that would be far more progressive. The current plan will be more regressive in its impact on the poor and middle class consumers. It exacerbates the already regressive Illinois tax structure.
—Whether you call it stealth, pyramid, double, or whatever adjective one can put in front of the word tax Business is not paying it and working people are getting screwed!
And this makes it worse by tying the tax to any sale of a good or service. The direct cost is simply passed on to a consumer–taxes on profits are very different because they only occur if a business makes a profit and thus aren’t a fixed cost. The GRT is the type of cost that is directly passed on to consumers and that hits poor consumers harder.
Taxes on food and drugs sales do hurt poor people the most.
That’s why they exempted Food and Drug sales from the GRT.
It makes sense. Other states didn’t do that for their GRTs, and it hurt them. It was a smart move. You would seem to agree.
Also – I tried to post to your top post on the front page, but it wasn’t working. Too bad, I had a nice rebuttal to your argument.
You do understand that when the sale of food and drugs go through a supplier there is then a tax put upon it so while there tax doesn’t occur at the company selling it directly to the consumer, all other Illinois businesses selling the product have to pay. IOW, in the hog example you have reduced the number of taxes on only one transaction leaving a company who imports the food from another state with no taxation and the company buying from a local supplier with taxation.
The didn’t exempt food and drug sales from the GRT, they exempted food and drug retail sales from the GRT under specific conditions. This is not a meaningless distinction.
I suppose that’s better than not exempting the retail sale, but it does very little to make this a progressive and not regressive tax.
The other mistaken assumption is that somehow poor and middle class people are only hurt when they buy things like food and drugs but that isn’t true–it also occurs when they buy clothes, rent property or buy a car.
And if one understands the shape of business for middle class and consumer businesses they shop at higher volume lower profit retailers meaning the costs will be pass along directly.
What is bizarre about these arguments favoring a GRT is that it’s supposed to be fair to the working folks while it actually screws them. One could create a tax on profits that would have far less direct connections to the products involved and place more of the burden on those businesses with the greater ability to pay. That’s better economic sense because it focuses on the ability to pay and not a flat tax on all businesses over a certain amount.
The central problem is that those businesses with the greater ability to pay are not necessarily those businesses who are paying taxes now.
How do you get those large, tax-free companies to pay under the income tax? There is a point there…
It isn’t just “closing loopholes”. Even if all “loopholes” were closed, companies like Abbott here in Illinois, and companies like Exxon in other states would still be able to hide their profits through accounting gimmicks.
Isn’t it regressive if most companies making over $50 million per year are not paying taxes to the state?
Food and Drugs are exempt, but what about the truck to deliver them? The packaging if made in Illinois? All of that gets piled on.
It’s a consumption tax. If all of your income goes to consumption, you pay proptionally far more than wealthy people who consume smaller shares of their income.
[…] I’ve been critical of the GRT proposal in the past and I will still argue it’s regressive. […]