May
3, 2007
ILLINOIS' PROPOSED GROSS RECEIPTS TAX
A Modified GRT Could Be Paired With Other Tax Changes
By Elizabeth C. McNichol and Iris J. Lav
Summary
Governor Blagojevich of
Illinois has proposed a new revenue source, a gross receipts tax (GRT), to
provide funds for a major health care expansion, public education, property tax
relief, and to help address the state’s long-standing budget problems. A GRT is
a low-rate tax on the receipts of all types of businesses. The governor’s
proposed GRT would exempt retail sales of food and drugs, Medicaid payments, and
the receipts of non-profits and
industries such as gaming and insurance already covered by other specialized
taxes.
A GRT in Illinois has a
number of significant advantages:
- its ability to raise substantial
amounts of needed revenue and to provide a more stable revenue stream over the
course of a business cycle than the corporate income tax;
- improved equity in tax payments among
different forms of business organization (such as corporations and partnerships)
and between goods-related and service-related industries; and
- a reduction in special-interest tax breaks.
There also are some
drawbacks to a GRT. There are, however, relatively simple ways to modify the
structure of a GRT to mitigate the problems and capitalize on the advantages.
Specifically, this report discusses how a subtraction for the cost of inputs
purchased from other businesses, coupled with a low-income credit, could
mitigate most of the problems of the GRT.
One potential problem with a GRT is its
impact on high-volume, low-profit margin businesses, for which the tax can
represent a high percentage of potential profits. Another potential problem is
that a GRT favors businesses that conduct most operations in-house over
businesses that purchase intermediate goods and services from other firms, since
the tax is imposed each time a business purchases inputs from an outside firm.
(This latter problem is called “pyramiding.”)
Illinois can address both of these problems,
however, by allowing businesses to subtract the cost of goods purchased from
other companies from the gross receipts subject to the tax. Texas and Kentucky
allow a similar, although broader deduction. If the cost of purchased inputs
were deductible, a retail discount clothing store — an example of a high-volume,
low-margin operation — would pay GRT not on its total receipts, but on its
receipts minus the amount it paid the wholesaler for the clothes it
sold. This would eliminate the disadvantage that such a store would have under
a GRT compared to a boutique clothing store with much fewer sales but a high
profit on each sale.
Similarly, the ability
to subtract the cost of purchased inputs would eliminate most pyramiding,
since the taxes paid during the intermediate stage of production would be
included in the purchasing business’s cost of purchased inputs and thus would
not be taxed again. Modifying the GRT in this way would help level the playing
field between companies that purchase goods and services from other companies
and “vertically integrated” companies that include multiple stages of production
and have in-house staff to provide legal, accounting, and other services.
Another potential problem with the GRT is the burden it can impose on low-income
households. A GRT is initially paid by businesses but a substantial portion of
the tax is likely to be passed on to final consumers through higher prices.
Low- and moderate-income households generally would pay a larger percentage of
their income in GRT than higher-income households. Low-income households spend
rather than save a larger share of their incomes and also are likely to spend a
greater share of their income in the state where they live.
This additional burden, however, could be offset by creating or expanding tax
relief targeted to low- and moderate-income families.
It should be noted
that these proposed changes — allowing a subtraction for the cost of inputs
purchased and providing tax relief for families — would reduce the revenue
gained from a new GRT somewhat below what the governor has estimated for his
proposal. The modified GRT would likely raise 60 percent to 70 percent of the
revenue that the Governor’s proposal would raise. To reach the revenue level
the governor has proposed, the modified GRT would have to be coupled with
additional revenue sources. One possibility would be an increase in the income
tax rate. It also might be desirable to retain and strengthen the corporate
income tax, with the GRT allowed as a credit against the corporate tax.
The Governor’s Proposal
In March, Governor Rod
Blagojevich proposed the establishment of a gross receipts tax — a major new
revenue source for the state. The GRT would be levied on Illinois businesses
and would eventually replace the state’s corporate income tax, according to the
governor’s plan.
A GRT is a tax on
business receipts. It applies whenever a product or service — from the raw
material through the finished product purchased by a consumer — “turns over”
(i.e., is sold by one business to another) in the process of making products or
providing services. For this reason, a GRT is sometimes called a “turnover
tax.”
For example, the
provider of steel used to make a car would pay the GRT on the sales price of the
steel it sells to the automaker, and a firm providing legal services to the
automaker would pay the GRT on the fees it charges. When the automaker sells
the car, it would pay the GRT on the revenue it receives from the car’s sale.
A business computes
the amount of GRT it owes by multiplying the GRT rate by the amount of revenue
received from its sales of goods or services. A GRT can raise significant
revenue with a very low rate because its base is extremely broad; a pure GRT
covers all types of businesses and applies to all business
revenue, not just profits.
The proposed Illinois
GRT is not a pure version of the tax, however. It would apply only to Illinois
businesses with more than $2 million in receipts, and would exempt retail sales
of food and drugs, Medicaid payments, and the receipts of non-profits and
industries such as gaming and insurance already covered by other specialized
taxes, as well as receipts from the sales of products that are shipped out of
state.
Advantages of a Gross Receipts Tax
Illinois would derive
a number of advantages from a GRT:
- Infusing much-needed revenue.
When fully phased in, the tax would raise over $7 billion annually, or about 25
percent of the state’s current general fund budget. The governor has said that
this additional revenue would be devoted to providing funds for a major health
care expansion, public education, property tax relief, and to help address the
state’s long-standing budget problems. The GRT would not immediately replace
the corporate income tax; instead, businesses would receive a credit against
their GRT liability for corporate income taxes paid. The governor has stated
that the corporate income tax would be eliminated in the future.
- Creating a more stable revenue
stream. The revenue stream from a GRT is significantly more stable than
that of a corporate income tax because businesses’ sales are not subject to the
wide swings that characterize their profits. For example, corporate income tax
collections dropped 20 percent in fiscal year 2002 and climbed 54 percent in
FY2004. This is considerably more volatile than business activity in the state
over the same period. In contrast, the portion of the state’s economic output
attributed to private businesses rose 1.9 percent in 2002 and 6.6 percent in
2004.
- Promoting tax equity among
businesses. All businesses in Illinois rely on government services. The
state’s transportation infrastructure and court system make it possible for
corporations to do business in Illinois, for example, while the state’s
education system provides a supply of trained workers for corporate operations.
Yet a considerable number of businesses in the state pay no corporate
income tax; Governor Blagojevich has noted that 37 of the Fortune 100 companies
paid no Illinois state tax despite having $1.2 billion in annual sales in
Illinois. He has further noted that on average from 1997 to 2004, nearly half
of all corporations with at least $50 million in annual Illinois sales did not
pay any state income taxes. Such businesses are contributing considerably less
to the costs of the government services they use than businesses that do pay the
corporate income tax.
Many businesses are able
to avoid Illinois’ corporate income tax by structuring themselves in other than
a classic corporate form, including as a partnership, subchapter “S”
corporation, or a limited liability company (LLC). Businesses operating in
these forms in Illinois pass their profits through to their owners, who may pay
tax at Illinois’ lower personal income tax rate — or may not pay tax to Illinois
at all if they live in other states. Unlike most states, Illinois does not
require that taxes be withheld before profits are distributed to out-of-state
owners or even that these owners sign a statement acknowledging that they owe
and will pay taxes to Illinois on these profits.
- Ensuring that service industries
contribute. The increasing importance of the production and consumption of
services in the state’s economy has reduced the growth of sales tax revenues — a
major revenue source for Illinois — because sales taxes are levied largely on
tangible goods and not on services. This problem is particularly acute in
Illinois as the state’s sales tax base is one of the narrowest in the country.
Illinois’ sales tax base includes only 17 of 168 services identified by the
Federation of Tax Administrators as potentially taxable. Service industries
such as legal, technology, and accounting firms sell services that are not
subject to the sales tax. Adding a broad-based tax like the GRT would help
broaden the state’s business tax base.
A GRT has advantages
over the expansion of the retail sales tax base to include services as a way to
ensure that service industries contribute to the cost of government services.
First, a gross receipts tax is initially a tax on businesses. While a
significant portion of the tax may be passed on to consumers, some of the tax
will be absorbed by the business through reduced profits and paid by business
owners who tend to have higher incomes than the average consumer. In addition,
GRT rates are considerably lower than retail sales tax rates because the broader
base includes many more types of service industries than could typically be
included under a sales tax. Moreover, the GRT falls on all sales of services.
By contrast, no state in recent years has expanded its sales tax to more than a
relatively limited selected group of services. The GRT has the advantage of
treating all services equally.
Key Features of Proposed
Illinois
Gross Receipts Tax
Tax
Base
The tax would be
levied on business receipts from sales of products and services in
Illinois.
Tax
Rates
There would be two tax
rates:
1.95 percent on sales of services
0.85 percent on
sales of goods
Exemptions
The following sales
would be exempt from the GRT:
Sales of
businesses with receipts of less than $2 million
Retail sales of
food and medicine
Sales of goods
for export out of state
Receipts from
Medicaid payments
Receipts of
non-profits
Receipts of
businesses covered by specialized taxes such as gaming and insurance
Other
Features
The amount of GRT
owed would be reduced by the amount of corporate income tax paid
The tax is
projected to bring in over $7 billion in revenue per year once fully phased
in
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- Eliminating tax loopholes. A
GRT would allow the state to make a fresh start in taxing businesses without
losing revenue from the exemptions and credits that have proliferated over time
in the corporate income tax and the sales tax. A GRT has a very broad base that
covers both goods-producing and service-producing businesses of all types. As a
result, it is not subject to some major corporate income tax avoidance
mechanisms, such as methods of organization in non-corporate form. The
experience of other states such as Washington suggests, however, that Illinois
will have to be careful not to add exemptions and credits to the GRT in the
future in response to pressure from specific industries. It would be important
to retain this advantage.
Concerns With A Gross Receipts Tax
This section outlines
the major concerns that have been raised about GRTs. The next section explains
how these concerns can be addressed.
The first concern
relates to high-volume, low-margin businesses. The GRT does not distinguish
among businesses based on how profitable they are. Businesses with a high
volume of sales but a low profit margin (such as gas stations or discount
clothing stores) are taxed at the same rate as highly profitable companies such
as jewelry stores, or boutique clothing shops, even though they may be less able
than those latter companies to pay the tax.
For example, a discount clothing store might sell items at just 1 or 2 percent
above the price it paid a wholesaler for them; a GRT of even 0.5 percent or 1
percent would reduce the store’s net income substantially and could affect its
ability to make a reasonable profit.
Another concern is
“pyramiding,” or the taxation of inputs as well as final products. The GRT is
levied each time a product or service is sold — whether the sale is of a
finished product to the end consumer or of an input to a firm that will use it
to create the final product. As a result, the total amount of GRT paid on a
final product may be significantly higher than the GRT rate levied on the final
product’s sale may suggest, because each of the raw materials or services
“consumed” in the creation of the final product would have been taxed when it
was purchased. For example, the steel and tires used to produce a car, as well
as any outside legal, accounting, or other services involved in the car’s
production, would be taxed as they are sold to the automaker and the automaker
may pass along this cost in the price of the final product.
Pyramiding can cause
economic distortions by creating incentives for businesses to act in inefficient
ways. For example, some larger companies may have a choice between buying their
inputs from other firms or making the inputs themselves; if they buy the inputs,
the purchases are subject to the GRT, but if they make the inputs themselves,
the purchases are not. Thus, the GRT may push companies to “vertically
integrate” — that is, to bring services and production of inputs into the
company rather than buying them from outside firms — in order to avoid the tax,
whether or not this would otherwise be the most efficient way to make the final
product. (How much of a push towards vertical integration the GRT provides
would likely depend on the GRT rate and the number of times inputs are turning
over.) In addition, companies that can vertically integrate would have a price
advantage — and thus a competitive advantage — over companies that cannot.
Pyramiding also can magnify the problems of a GRT for high-volume, low-margin
businesses if it results in increased prices for purchases from wholesalers.
Is the GRT a “Hidden” Tax and Is
This a Problem?
A number of critics
of the Governor’s proposal argue that a Gross Receipts Tax will reduce the
accountability and transparency of Illinois’
tax system and could result in poor policy choices in the future.
The GRT is a tax on businesses rather than on
individuals. Like other business
taxes it will be passed on to individuals — either to owners of capital
through reduced profits, to consumers through higher prices or to workers
through lower wages. Most economists
agree that a considerable portion of a GRT will be passed on to consumers
like a retail sales tax but, unlike a sales tax, the amount of the tax will
not be shown on the bill a customer receives.
Some argue that this will make it easier for
future governors to raise the GRT rate without having a full discussion of
the impact of the higher tax. In
reality, history shows that any proposals to raise business taxes — all of
which are paid only indirectly by individuals — are subject to considerable
debate by the legislature and receive scrutiny in the media. Businesses and their trade organizations are well positioned to take
note when changes to business taxes are proposed and are unlikely to let
them slip through without adequate debate.
In one sense it is
very appropriate that the GRT be reflected in the price of the products
sold. The GRT should reflect the cost to a business of the government
services that allow it to operate in Illinois
just as other business inputs such as materials, compensation and privately
provided services are reflected in the price of their product.
A gross receipts tax is not the
only tax levied on businesses that is not seen on bills to consumers. Businesses also pay property taxes which are reflected in the cost of
doing business and potentially in the price of products. One of the proposed uses of the GRT in Illinois
would be to reduce property taxes – both directly through targeted credits
and indirectly by providing additional state aid for schools. In total, the impact of the GRT on consumers will likely be
considerably less than the total amount of revenue raised, when the
reduction in this other “hidden” tax is accounted for as well as the
likelihood that businesses will not pass along the full amount of the GRT.
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The potential economic
distortions caused depend on the amount of pyramiding that occurs. Studies of
the Washington state Business and Occupation tax and the New Mexico GRT show a
not insubstantial amount of taxation of business inputs.
New Mexico estimates that 15 percent to 30 percent of GRT revenues result from
taxation of business-to-business transactions.
Another potential
problem with pyramiding may occur for businesses that sell products out of
state. A GRT could put Illinois businesses at a disadvantage when selling
products out of state because they would be competing with businesses than do
not have to pay the GRT. The tax proposed by Governor Blagojevich would
moderate this problem by exempting the revenue from final sales that are
exported out of the state. However, these exported items might still have some
tax costs embedded in them if, for example, the raw materials used to make them
were purchased in the state.
Concerns have also
been raised about a GRT’s effect on individuals. A considerable portion of a
GRT would likely be passed along to the buyers of the taxed firm’s products
through higher prices. As a result, a GRT is similar to a sales tax from the
perspective of individuals. Like the sales tax, a GRT is regressive:
lower-income people will pay a larger share of their income in GRT-related
costs than high-income people, on average, because low-income families spend
rather than save a larger share of their income. In addition, lower-income
people are more likely to spend their money close to home, where the goods and
services are subject to the GRT.
The governor partially
addressed this concern by exempting retail sales of food and drugs — two
necessities that make up a significant share of family expenses — from the GRT.
However, sales of these items from a manufacturer to a retailer would be subject
to the tax, and much of this tax would likely be passed along to consumers.
Finally, some
are concerned that the GRT may reduce the transparency and accountability of the
tax system by creating a “hidden tax.” To the extent that a significant portion
of the GRT is paid by consumers of finished products through higher prices, the
GRT would be largely invisible to the purchaser of the end product — unlike the
sales tax which is shown on a sales receipt. As a result there is concern that
the rate of the Gross Receipts Tax would not be subject to full consideration
and debate by the public. (See the box on page 6 for further discussion of this
issue.)
Modifications to the GRT Can Address These
Concerns
As noted above, the
governor’s proposal addresses several of the concerns traditionally raised about
GRTs. It would help firms that sell products out of state by exempting from the
GRT the revenue from those out-of-state final sales. It would help lower-income
people by exempting retail food and drug sales from the GRT. And it would help
start-up businesses that are not yet profitable, as well as “mom and pop”
businesses with low profitability, by exempting firms with less than $2 million
in receipts from the tax.
Nevertheless, Illinois
could do much more to mitigate the potential problems with a GRT — as other
states with GRT-type taxes, such as Texas and Kentucky, have done.
PROVISIONS OF STATE GROSS
RECEIPTS-TYPE TAXES |
State |
Items Taxed |
Rate |
Size of Business |
Food and/or medicine exempt? |
Exports exempt? |
Illinois proposed |
Receipts of all non-exempt
businesses |
1.95% for Service
producing businesses 0.85% for Goods-producing businesses |
Businesses with less than
$2,000,000 in receipts are exempt |
Yes, retail sales of food
and medicine |
Yes |
Delaware |
Gross receipts of all
non-exempt businesses |
Selected rates:
Manufacturers: 0.180%
Wholesalers: 0.307%
Retailers: 0.576%
Food processors: 0.154%
Occupational/Professional/General Services: 0.384%
Additional rates for
specific industries |
Retailers and wholesalers
can deduct $80,000 per month.
Manufacturers can deduct
$1 million per month. |
No |
In most cases. |
Kentucky |
Tax is an alternative
minimum calculation coupled with the corporate income tax. Corporations
can choose one of two bases: gross receipts or gross profits (gross
receipts minus cost of goods sold.) |
The lesser of:
0.095% of gross
receipts
or
0.750% of gross profits
(gross receipts minus costs of goods sold) |
Businesses with both gross
receipts and gross profits of less than $3,000,000 are exempt. |
No |
No |
Ohio |
Receipts from commercial
activity of non-exempt businesses |
0.26% |
Businesses with receipts
under $150,000 are exempt; those with receipts between $150,000 and
$1,000,000 pay $150 |
No |
Yes |
Texas |
The lower of:
70% of revenue;
revenue minus cost of
goods sold; or
revenue minus
compensation cost |
0.5% of sales of retailers
and wholesalers 1% of sales for all
other businesses
|
Businesses with gross
receipts under $300,000 are exempt (may rise to $600,000) |
No |
Yes |
Washington |
Gross receipts as measured
by gross sales, gross income or value of products produced in state |
Retailing: 0.471%
Wholesaling: 0.484%
Manufacturing: 0.484%
Services: 1.5% |
Businesses with gross
income of less than $28,000 are exempt |
No |
No |
Note: This table does not
include state taxes that are called gross receipts taxes but that function
as retail sales taxes such as those in New Mexico and Hawaii. In addition
to the taxes listed, Illinois, Delaware and Kentucky have corporate income
taxes while Ohio and Washington do not. The Texas tax described here will
replace the state’s corporate franchise tax which includes a tax on
corporate profits. |
- Ensure fair treatment for
high-volume, low-margin businesses. Illinois could
significantly reduce the impact of the GRT on high-volume, low-margin businesses
if it allowed businesses to subtract the cost of purchased inputs from the total
receipts subject to the GRT. Allowing businesses to subtract the cost of
purchased inputs would help high-volume, low-margin businesses, which would be
able to subtract the amount they paid for their inventory from the amount of
their final sales and pay GRT only on the difference.
Thus, businesses with different profit margins would be treated more fairly
under the GRT. Texas and Kentucky allow a similar but somewhat broader
deduction by allowing businesses to subtract the “cost of goods sold,” — which
means the cost to the company of the inputs used to make the final product —
from the base of their GRT.
- Eliminate most pyramiding.
Allowing businesses to subtract the “cost of purchased inputs” also
significantly reduces the problem of pyramiding. For example, if an automaker
buys $10,000 worth of parts from another company to make a car that it sells for
$25,000, its total receipts from the car sale for GRT purposes would be $15,000
($25,000 in sales minus the $10,000 paid for parts). The GRT would not be paid
twice on those parts.
- Retain a corporate income tax to
ensure that all businesses pay their fair share. Some states, seeking both
to ensure that businesses benefiting from state government pay their fair share
of taxes and to continue tying business taxes to ability to pay, have retained
their corporate income tax even while enacting a GRT-type tax. In Kentucky’s
case, the amount of GRT owed can be credited against the amount of corporate
income tax owed, so businesses pay the larger of the two. Delaware levies both
a GRT and a corporate income tax but does not link the two. New Hampshire,
levies a value-added tax that shares characteristics with a gross receipts tax,
which it also allows as a credit against its corporate income tax.
Illinois could choose to
retain its corporate income tax and allow the GRT as a credit against it. This
would insure that all types of businesses — including those with relatively low
receipts but high profits — pay a fair share. This would be particularly
effective if Illinois took the opportunity to repair some flaws in the corporate
income tax. (See below.)
- Protecting lower-income and
moderate people. The regressive impact of the GRT could be mitigated
through the expansion or creation of tax credits targeted on low and moderate
income families. An efficient way to offset the GRT’s impact on low-wage
working families would be to significantly expand the state’s earned income tax
credit (EITC). The Illinois EITC equals just 5 percent of the federal EITC.
Only one other state with an EITC has a rate this low. Even absent a new GRT,
there are many reasons to expand the current EITC. The GRT would make a major
expansion even more important, since food and medicine would be taxed under the
GRT at levels before the final sale. Additional tax relief could be targeted to
low- and moderate-income families that do not qualify for the EITC.
Raising Sufficient Revenue
Exempting inputs from the GRT base would raise somewhat less revenue than the
governor’s proposed GRT. While a precise estimate of the reduction in revenue
that would result from these types of changes is beyond the scope of this paper,
examination of data on business-to-business sales and the experience of other
states suggests that allowing the exemption of cost of goods sold would reduce
revenues from the proposed GRT by 30 to 40 percent. Thus rather than raising
$7.6 billion when fully phased in, the GRT would raise approximately $4.6 to
$5.3 billion
Some of the difference
could be made up by raising the GRT rate, although GRTs generally work best when
the rate is fairly low. As a result, achieving the goals in education, health,
and property tax relief that the governor and the legislature are discussing
would likely require additional revenue increases. These increases could be
designed to fall on a wider range of residents than a GRT alone.
One option would be
raising the income tax rate. Depending on the amount garnered from the GRT and
other sources, the income tax rate increase could be relatively modest. A one
percentage point increase in Illinois’ personal income tax rate would raise
approximately $3 billion.
Retaining the corporate
income tax as described above — with businesses paying the larger of the GRT or
the corporate income tax — could also bolster GRT revenues. The corporate
income tax could be improved at the same time in order to make it a better
candidate for retention with a modified GRT. For example, a return to a
three-factor apportionment formula (sales, property, and employment) would
spread the tax more broadly. In addition, the definition of businesses
subject to the corporate income tax could be expanded to include Subchapter S
corporations and some limited liability companies. Or, Illinois could require
that taxes be withheld before profits are distributed to out-of-state owners or
that these owners sign a statement acknowledging that they owe and will pay
taxes to Illinois on these profits. These changes are described more fully in
the Appendix to this paper.
Conclusion
Governor Blagojevich’s
GRT proposal is a constructive step toward making Illinois’ tax system stronger
and fairer while providing resources needed to help address state priorities.
While concerns have been raised about the possible effects of a GRT, the most
serious of these could be addressed by a few modifications to the governor’s
proposal.
Appendix:
Some Options for Improving the Illinois Corporate
Income Tax
(1) Eliminate the
single sales factor formula and return to a three-factor apportionment.
When a corporation produces and/or sells goods and
services in more than one state, each state requires the business to pay tax on
just a portion of its profit. The tax laws of the large majority of states
determine the portion of the corporation’s profit that is subject to tax in
relation to the shares of the corporation’s total property, payroll, and sales
located in each state.
Under New Jersey law, for example, a widget
manufacturer that had its only factory and all of its employees in Trenton but
sold all of the widgets outside the state would have one-half of its total,
nationwide profit taxed in New Jersey. (Like many states, New Jersey gives the
same weight to the location of sales as it does to the location of property and
payroll combined.) The remaining half of the corporation’s profit could be
subjected to tax by the states in which its products are sold. This result
reflects a broad consensus that states that provide services to a corporation’s
property and workers and states that provide a market for the corporation’s
output should be empowered to tax roughly equal shares of the corporation’s
profit.
Illinois, on the other hand, has apportioned the
income of multi-state corporations based only on the amount of sales they have
in Illinois since 1998. This approach is called a single sales factor formula.
Returning to a three-factor apportionment formula would raise additional revenue
and ensure that multi-state corporations pay their fair share of corporate
income taxes.
(2) Expand the definition of businesses
subject to the corporate income tax to include Subchapter S corporations and
some limited liability companies. Or, Illinois could improve personal income
tax collections from out-of-state owners by requiring that taxes be withheld
before profits are distributed to out-of-state owners or that these owners sign
a statement acknowledging that they owe and will pay taxes to Illinois on these
profits.
(3) Modify the
statutory definition of the unitary group to include unregulated investment
subsidiaries and captive insurance companies. Illinois is in litigation with
Exxon and Waste Management right now over whether their captive insurance
companies can be combined. In addition, the fact that Illinois' corporate
income tax statute doesn't allow financial institutions to be combined with
non-financial entities has been a recurring problem, with corporations setting
up out-of-state investment affiliates and isolating income and assets in them as
well in order to reduce taxes owed to Illinois.
(4) Switch to the
so-called "Finnigan" approach to unitary combined reporting (named for a
California court case in which the issue was first raised). This issue arises
when on or more members of a multicorporate group are subject to the Illinois
corporate income tax (“have nexus”) and other members of the same group do not.
Under this approach, any sales into the state by out-of-state corporations that
don't have corporate income tax nexus in Illinois are deemed to be sales made by
the parent or sister corporations that are taxable in Illinois. This
change is particularly important if Illinois retains the single sales factor
formula.
End Notes:
For a discussion of the geographic profile on different household spending
patterns, see, for example, Andrew Bernat and Thomas Johnson,
"Distributional Effects of Household Linkages,"
American Journal of Agricultural Economics,
73(2) May 1991.
Other types of businesses could have difficulty paying the tax in years of
low profitability.
The lower the rate of the tax the less likely it is that companies would
make decisions about their organization as a result of pyramiding of tax
rates. Thus, lowering the rate of the GRT could also mitigate some of these
problems. This would, in turn, lower the revenue that the tax raised,
requiring reduced spending or the need to raise additional taxes.
The base of the Washington State B & O tax — total receipts reported to the
state’s Department of Revenue — significantly exceed Washington’s total
gross state product. This is the result of the taxation of goods at more
than one stage of the production process. An analysis for the Washington
State Tax Structure Committee estimated an average pyramiding rate of 2.5.
Texas also allows businesses to subtract either the costs of the inputs
purchased for production or the total amount spent on worker compensation;
of course a rational business will choose to deduct whichever is greater.
By “cost of purchased inputs” we mean the amount that one company pays to
another company for goods and materials that are either purchased for resale
or are used in the production process. It differs from “cost of goods
sold”, which also includes the labor and other costs required to produce a
final product or prepare an item for resale.
A value-added tax eliminates the problems of pyramiding by taxing only the
incremental value added by businesses at each step of the production and
wholesaling process. New Hampshire is the only state with a value-added
tax. Most economists consider value-added taxes superior to gross receipts
taxes in terms of their impacts on the economic decisions of businesses.
However, VATs have proven politically unpopular in the United States. The
only other state with a VAT — Michigan — has just repealed the tax, and
attempts to institute VATs in other states have failed.
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