Governor Blagojevich put himself in a political
box by twice making campaign pledges to not raise
individual income taxes or sales taxes. It is a laudable
and popular stance he has been emphatic about
sustaining. However, without a comparable commitment to
fiscal discipline, it is extremely problematic when
spending significantly out paces revenue, as is the case
with Illinois state government.
Governor
Blagojevich put himself in a fiscal box by failing to
control spending during his first term. It is true he
inherited financial problems but, after four years in
office, little progress was made to correct the fiscal
imbalance. The state budget increased by $3.4 billion
during his first term. By comparison, Governor Ryan’s
four year spending increase was $2.5 billion.
Comptroller Hynes recently stated the discrepancy
between annual spending and revenues to be $2.3 billion
at the close of the 2006 fiscal year.
Now the
Governor has called for the largest and most ambitious
set of spending programs ever set forth by an Illinois
Governor. If approved, state government would rake in
over $7 billion in new revenue. The Governor’s FY08
budget recommends a one year spending increase of $3.1
billion.
Where does the Governor find billions
of dollars in new revenue while remaining true to his
implied campaign pledge to not raise taxes -- or, to
split hairs, that he would not seek to raise taxes seen
by individuals? He wants more money from employers.
His solution is adopting a gross receipts tax
that would impose a new tax mechanism on Illinois
business that grows by taxing the multiple transactions
in the business supply chain. The Governor wants to
claim a portion of every dollar a business touches. The
political appeal is obvious, as the scheme will generate
billions while hiding much of the burden from consumers.
The Governor has hatched a bold and audacious
plan that is capable of generating the billions he seeks
to provide taxpayer financed healthcare for hundreds of
thousands of people who are currently uninsured in
Illinois. He anticipates the gross receipts tax will be
so productive it will generate enough revenue to also
satisfy perennial government spending demands associated
with education, public employee pensions and capital
investments in schools, transportation, as well as state
and local government facilities.
It is the
Blagojevich version of the age-old game of political
“log rolling”. In order to get a greatly expanded
healthcare program he intends to raise enough new tax
money to ensure funding for legislators’ interests who
must then vote to approve his tax plan.
The
Governor needs the gross receipts tax because no matter
how aggressively he may pursue changes in the corporate
income tax, it will not yield the billions he seeks. The
state constitution prohibits an increase in the
corporate income tax rate without an increase in the
individual rate. Even if all corporate income tax
deductions, exemptions and credits were removed, the
Commission on Government Forecasting and Accountability
estimates the tax yield would amount to about $200
million. Even if the state reverted to the old three
factor formula for calculating corporate income tax that
was abandoned in 1999 the increased revenue is only
estimated at about $100 million. Obviously, such an
adjustment would not be enough to satisfy the Governor’s
ambitions.
The Governor’s attack on the
corporate income tax is just an excuse to impose an
additional tax on employers. The corporate income tax
and corporate personal property replacement income tax
will remain intact for the foreseeable future. The
Governor needs the income tax and gross receipts tax
revenues to attempt to resolve the backlog of fiscal
problems and engage in extravagant new spending.
Where did this come from?
The
gross receipts tax concept captured attention because,
despite disfavor among tax policy experts, four states –
New Jersey (2002), Kentucky (2005), Ohio (2005), and
Texas (2006) –recently adopted gross receipts tax laws.
Contrary to Governor Blagojevich’s objective to
increase the tax burden of employers, three of the four
states chose to pursue a gross receipts tax as part of
an overall strategy to reduce business taxes. While
there was support for a gross receipts tax among some
quarters of the business community in these states, it
was because they expected to enjoy tax savings.
New Jersey adopted the gross receipts tax to
generate more revenue from businesses. This took the
form of an alternative minimum assessment so that even
businesses experiencing losses would be required to pay.
Democratic Governor Jon Corzine allowed the tax to
expire in 2006 because, according to the state
treasurer, the gross receipts tax was not “consistent
with the Governor’s desire to stimulate economic
growth.”
New Jersey is the only one of the four
states with enough experience to evaluate its impact on
the economy. A study by Rutgers University on the New
Jersey economy found “in the 2000-2005 period, the state
lost 117,600 high-paying advanced services and
manufacturing jobs.” While not directly or exclusively
attributable to the New Jersey gross receipts tax, the
parallel is conspicuous.
Kentucky’s decision to
impose a gross receipts tax in 2005 was part of a tax
restructuring that included reduction of the corporate
income tax from 81/4% to 6%, repeal of the corporate
license tax, reduction of the personal income tax rate
and raising the individual exemption to exclude
thousands of low income taxpayers from liability. It was
presented as a revenue neutral program. A $1 million
dollar GRT exemption was established in 2006. During a
subsequent special session called by Republican Governor
Ernie Fletcher the exemption increased to $3 million and
a graduated rate was created for business with gross
receipts between $3 and $6 million. The Kentucky
Association of Manufacturers opposed the tax and is
committed to its repeal.
Ohio’s change
eliminated the corporate income tax, personal property
tax on business equipment (a tax Illinois repealed in
1980) and reduced the individual income tax rate 21%
from 7.5% to 5.9%. The only partially phased in gross
receipts tax rate of 0.1% has already exceeded projected
revenue by more than $500 million. After one year’s
experience, there are already suggestions the Ohio rate
should be reduced because it is bringing in so much more
revenue than was anticipated.
The rate proposed
by Governor Blagojevich is 500% higher for manufacturers
and 1800% higher for services than the current rate in
Ohio. When the Ohio rate of .26 is fully-implemented in
spring 2009, after elimination of the corporate income
and personal property taxes, the proposed Illinois rates
will still be double for manufacturers and more than
seven times higher for services. The Ohio experience
offers reason to believe Governor Blagojevich has
greatly understated likely revenue projections that
would generate from his tax rates.
Texas has not
yet implemented their new alternative margins tax.
Unlike Governor Blagojevich’s approach Texas’ version of
a gross receipts tax incorporates significant cost of
doing business deductions. Texas also chose lower tax
rates. Texas repealed the corporate franchise tax that
was the major business tax in the state and reduced the
real estate tax for schools by 1/3 thus saving taxes for
individuals and business alike. The new law does not
become effective until 2008. Governor Perry, a
Republican who supported the new tax, called for cutting
the rate in half within months of putting his signature
on the bill.
Washington is the only state with a
long history of relying on a gross receipts tax as a
major revenue source. Like Texas, the Washington state
constitution prohibits a personal or corporate income
tax. The business and occupations tax (as it is called)
has been subject to constant amendment since introduced
in 1933. There are 34 separate classifications funneling
businesses into one of six different tax rates.
Indiana abolished their gross receipts tax in
2002, seventy years after it’s 1933 introduction as a
temporary measure to help finance government during the
Depression. There were previous efforts to phase out the
tax during the 1970s and 1980s, but during economic
downturns, tax reform plans were superseded by the
state’s revenue needs.
The long despised tax was
finally eliminated as part of a much larger tax
restructuring plan. Democratic Former Governor Joe
Kernan pushed for repeal to make Indiana a more business
friendly state. Indiana Chamber President Kevin Brinegar
called the gross receipts tax particularly onerous:
"In Indiana we fought long and hard to repeal
the corporate gross income (receipts) tax. A corporate
gross income tax is bad tax policy because it makes
businesses pay even in years in which they are not
profitable. Gross income taxes are a huge "red flag" to
site selection consultants who will steer clients away
from states that impose these taxes. It is a major
reason why we fought so hard to repeal the tax in
Indiana.
Eliminating Indiana's corporate gross
income tax (as well as the inventory tax) in 2002 has
dramatically improved Indiana's national business tax
climate ranking to 11th best according to the Tax
Foundation. Reducing business taxes has directly
contributed to significant new business investments in
our state, including the Honda plant in Greensburg, the
$3 billion expansion and renovation of the BP refinery
in Whiting and major investments by the steel companies
in northwest Indiana."
In other US states,
Delaware has a gross receipts tax, but no sales tax.
Hawaii has a gross excise tax, but it operates as a
broad based sales tax by a different name.
Motives
The Governor’s motivation
for pursuing a gross receipts tax is strictly related to
money. The objective is to find billions of dollars to
throw at the state’s financial problems and satisfy the
hunger many constituencies have for huge increases in
government funding. Complaining about weaknesses in
corporate income tax collections serves no useful
purpose other than as a red herring. “Fixing” the
corporate income tax does not yield enough money to
satisfy the Blagojevich spending appetite.
The
corporate income tax has never been the primary source
of business taxes. Indeed, it has been in steady decline
since the late 1970s. The phenomenon is not unique to
Illinois. It is a national trend affecting states and
the Internal Revenue Service.
This is due partly
to growth in partnerships, limited liability companies
and other pass-through business structures that allow
profits to flow directly to individual owners. Owners,
of course, pay personal income taxes, but pay a lower
rate than is imposed on the “C” corporate structure.
I have received more email and engaged in more
communications with small business owners since the
Governor’s speech on March 7 than at any time since
joining the Illinois Chamber. Small businesses are the
primary employers in most Illinois communities. My
experience in the last two weeks suggests that small
business owners understand the implications of the
Governor’s plans and are threatened by the idea of
having to pay taxes based on gross receipts of their
business.
Several small business owners have
expressed frustration and outrage at receiving a letter
from the Governor’s office informing them they will be
exempt from the gross receipts tax if their business
handles less than $1 million a year. Those I am hearing
from do not believe they won’t pay gross receipts tax
even if they are not required to collect or remit it.
They think the administration’s message is misleading.
Another contradiction receiving attention is the
Governor’s juxtaposition on sharing the business tax
burden. In his March 7 speech, the Governor asserted
that 80% of corporate income tax filers paid little or
no tax. Later the Governor declared that 75% of all
businesses in Illinois will see little or no change in
their taxes under the “tax fairness plan”. Business
owners are asking, if this is true, what’s the
difference? Who are the businesses in that 5%? If 75%
are to be exempt, who is going to pay the $6 billion the
Governor expects from the new gross receipts tax?
Show us the legislative language
The Blagojevich administration has once again
rolled out a major initiative without providing the
public with substantive language in bill form that can
be analyzed and questioned.
In 2003, the
Governor withheld text of his business tax and fee
increase legislation until the final hours of
legislative session and presented the General Assembly a
“take it or leave it” proposition. His campaign finance
reform measure announced as “legislation that will rock
the system” was given little or no outside review prior
to the bills introduction. The “All Kids” program was
best known for the press release, lack of detail and
rushed hearings held without benefit of a bill. His
approach was to simply give authority to the Department
of Health and Family Services so bureaucrats can work
out details in rules and regulations.
Now there
is a proposal for the biggest tax increase in Illinois
history -- a tax increase the National Tax Foundation
calls the biggest tax increase by any Governor in any
state during the last decade. Two weeks after the
announcement there is still nothing substantive to
review. No statutory language or bill has been presented
to the General Assembly. All descriptions and
explanations have come from the Governor’s speech and
subsequent appearances, briefings from members of the
administration, notes taken in individual taxpayer or
industry group meetings with government employees who
presumably have some inside knowledge about the plan,
the Governor’s letter to small business owners, and
other pronouncements and explanations offered via media
coverage.
The Illinois Chamber’s staff and Tax
Institute members will review and critique the
legislation as soon as a bill can be obtained. The
Illinois Chamber will report on details of the measure
and be better prepared to answer members’ questions
about how the gross receipts tax will affect their
businesses once we have seen a bill.
Stay tuned
for more messages regarding the Governor’s plans for a
gross receipts tax in Illinois. |
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Take Action Now
The
Governor has offered his vision for more taxes and more
spending. I encourage opponents to the Governor’s vision to
make your opinions and business circumstances known to
legislators: remember, only legislators can vote to raise or
reduce taxes. Legislators shape and authorize the state’s
budget, the Governor does not vote. Only legislators can keep
the gross receipts tax out of Illinois, so focus your
attention on legislators.
Use the Illinois Chamber’s
“Grassroots
Action Center” to communicate to legislators, and take
advantage of every other opportunity to let legislators know
your opinion.
If you are a business owner or manager
and are willing to speak publicly on the true negative
implications of a gross receipts tax, please email me as we
are actively seeking business people to respond to media
inquiries and serve as spokespersons on behalf of Illinois
employers.
Visit the gross receipts tax web site,
largesttaxincreaseever.com,
to keep up with the latest information about this topic.
Please consider posting your story and help the Illinois
Chamber build the case for what the gross receipts tax is bad
for employers.
Share this message with others and help
recruit employers to join the fight to protect employers and
save Illinois jobs. |
