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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.
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 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.
[Text copied from
University of
Illinois news release]
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