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My earlier post “Who Pays Business Taxes?” was partially in response to the political tactics of Illinois Governor Rod Blagojevich who unveiled an updated Gross Receipts tax proposal today (with even higher rates, naturally) and a website aimed at continuing the charm offensive he has unleashed in the last few days. In it, he describes why the current system is broken and why his Gross Receipts proposal is a fairer alternative that does not raise sales or income taxes (a campaign promise of his).

Myth #1: Gross Receipts Taxes are Fair

The Governor’s first assertion is that “most economists agree that the least disruptive tax on business is one with a broad base and a low rate”. That is true for income taxes. However, a lot of economists also agree that Gross Receipts taxes are among the most disruptive form of taxation because of the pyramiding and distortion effects that they have. Governor Blagojevich, naturally, leaves this corollary out of his argument.

Myth #2: A Lot of Companies Won’t Pay the Tax

His next “fairness argument” lists all of the industries that will not pay the tax. His list includes insurance, gaming, retail food and drug, securities, and not for profits as all exempt from the tax. Well of course they are! Insurance companies pay the premiums tax and are not included in the corporate income tax. Gaming companies pay a tax on wagers and are also exempt from the corporate income tax. Securities traders will pay on profits not proceeds of sales, which is their true income. And how nice of Governor Blagojevich to exempt not for profit entities that can’t be taxed.

The Governor also points out that businesses with less than $2 million in receipts will not pay the tax. That would seem to say that small businesses will be exempt from tax. Wrong! They will simply continue to pay the old income tax rather than pay the new gross receipts tax. The enabling legislation says that the income tax will phase out for small businesses on December 31, 2011, if and only if another tax is implemented to make up the revenue from the repeal of the income tax on small businesses. Another switcharoo from the Governor.

Myth #3: Our Gross Receipts Tax is Different 

The Governor goes on to list why the gross receipts tax won’t have the pyramiding effect. His first argument is that exports from Illinois won’t be taxed. That’s because Illinois can’t tax sales in other states under Federal law. How nice of the Governor to respect Federal law like that. He also says that transactions between affiliates won’t be taxed. Illinois requires a combined return from companies and intercompany transactions are eliminated from a combined return. Again, he can’t really tax these transactions, so he is graciously exempting them from the tax. And his argument that goods being taxed at a lower rate to avoid pyramiding is ludicrous. It’s a bone thrown to the manufacturers in the state and has nothing to do with the economics of the tax.

Myth #4: We’re Like All the Other States 

In the last section he lists other states that have adopted Gross Receipts taxes in the past year. He cites Ohio and Texas specifically.

Ohio did enact a Gross Receipts tax at a rate of 0.26%. The legislation also eliminated the personal property tax in Ohio and exempted sales of business assets from the tax. Illinois doesn’t have a personal property tax because it has what is known as the Replacement Tax. The Replacement Tax is levied at 2.5% of a corporation’s Illinois profits. The Gross Receipts tax will be creditable against the 4.8% Corporate Income Tax but not the Replacement Tax. So, Illinois is citing a state that eliminated the personal property tax, exempted sales of business assets, and levied a 0.26% tax rate to support a tax that does not eliminate the Replacement tax, doesn’t exempt sales of business assets, and has a tax rate of 1.95%?

A better example might be Texas, which enacted the Gross Margins Tax last year. It has tax rates of 0.5% for retailers and 1% for everybody else. That’s closer to the 0.85%/1.95% rates of Illinois, right? Well, not really every taxpayer gets a deduction for Cost of Goods, Compensation Paid, or 30% of the tax base. Basically, that means that the highest possible rate a taxpayer will pay is 0.35%/0.70%. A company with low margins will likely pay a lot less. The Texas bill also lowered property tax rates by 33%. So, again the Texas tax significantly lowered property taxes and is at rates significantly smaller than Illinois’ tax.

Once you begin to analyze the Governor’s positions with an educated mind, his arguments fall flat. He’s exempting companies that either pay other taxes or cannot be taxed and he’s exempting sales that he can’t tax anyway. What a deal for Illinois!

I don’t dislike Blagojevich and I usually vote Democrat, but I can’t stand when politicians flat out lie to their constituents in an attempt to get a bad idea through. This bill will hurt business in Illinois and will drive new business away. I’m not saying that as an anti-tax conservative, I’m saying it as someone that has studied other taxing structures developed by the states. This goes so far beyond the pale that Illinois will look like Michigan in twenty years, a state desperate to replace an unfair, job-killing taxation system that was designed when times were good.

Please Mr. Blagojevich, stop this madness!