J. Fred Giertz is a professor of economics and a faculty member at the Institute of Government and Public Affairs at Illinois. An expert on the Illinois economy, he compiles the monthly Flash Index and frequently analyzes taxation proposals. Giertz specializes in state and local taxation and expenditure analysis and in regional economic development issues.
Define gross receipts tax for us.
The gross receipts tax would be a new tax for Illinois, and is rarely used around the country. It is a tax on all transactions between businesses and between businesses and consumers. Unlike the sales tax, which is only a tax on the final sale, a gross receipts tax has the characteristic of pyramiding or cascading where the same thing is taxed again and again in the production process. The governor’s proposal is a hybrid because there are different rates. There is a 1.8 percent rate on services and a .5 percent rate on personal property. So, it’s not a flat rate tax, but it’s supposedly a low rate tax on a very broad base that would generate a great deal of revenue.
Is this a common way for government to increase revenue?
No. In fact, it’s a very unusual way. There are only a few states that have this, and the ones that have it impose a much lower rate of taxation. The beauty of this tax, if there is a beauty, is that it is a low-rate, broad-based tax. It flies under the radar screen and doesn’t have a lot of political visibility and can generate a lot of revenue. But the Illinois tax is much higher than any other similar tax in place now and is going to generate a great deal of extra revenue, about five times the amount of revenue that the existing corporate tax produces.
This proposal has been characterized as a tax on business that will close loopholes in the state’s corporate income tax structure and ease the burden for the middle class. What’s wrong with that?
The tax has been characterized as not a tax on people, but a tax on business. Unfortunately, there is no such thing as a tax that is borne by business. It may be collected by business, but all taxes are eventually and ultimately borne by individuals. It’s a tax that has some similarities to the sales tax, but it’s not as neat and clean as the sales tax. The business community is actually buying the governor’s argument. They think it is a tax on business. But the fact is, is it is actually a tax on the people of Illinois whether you call it a gross receipts tax or a sales tax or whatever.
Can the money generated by this tax solve the state’s budget problem?
That’s another issue. Comptroller Hynes thinks the size of the budget problem is about $2 billion. Various estimates are from $2 billion to $3 billion. This tax would raise $5 billion or $6 billion, so it would not only solve the problem, it would create an expansion in the size of government. However, there is a clear need for some extra revenue in the state of Illinois. We have been operating in a situation where our revenues have not covered our continuing expenditures. But this actually would not just close the gap. It would close the gap and produce $2 billion or $3 billion of extra revenue.
