The Grossest New Antibusiness Tax Trend

July 31, 2012 J

By: Casey Given

Ten years ago, gross receipt taxes seemed like a dying relic of the Great Depression. At the time, Washington was last state standing with this antiquated tax on business transactions in its books. Indeed, it seemed like the states as a whole were hammering the nails in its coffin when, all of a sudden, New Jersey raised the monster from the dead in 2002 through enacting the first gross receipt tax in decades. This resurrection had a resounding effect on national tax policy, with several states following Trenton’s lead in the years hence. Today, ten states have some sort of gross receipt tax, burdening their businesses with this complicated charge that affects industries unequally and disproportionately penalizes small companies.

Similar to monster from the movie that also rose from the dead, the gross receipt tax is a Frankenstein mixture of corporate and sales taxes, but even worse. Like corporate taxes, it is charged to businesses, and, like sales taxes, the charge is often passed down to consumers directly on their purchases.

But, while sales taxes are limited to customers’ purchases of final products, gross receipt taxes apply to every business transaction that a company makes including for raw materials. Thus, industries whose products undergo multiple stage of production pay much more than those whose do not. Economists call this phenomenon a “pyramiding” effect, often criticizing it for unequally penalizing industries based on the nature of their product.

Also, while corporate taxes only take a portion of a company’s profits, gross receipt taxes charge a portion of the total amount of money exchanged in businesses’ transactions regardless of the company’s gain. This disregard for companies’ costs disproportionately penalizes small businesses with slim profit margins.

To illustrate this point using a helpful example from the Tax Foundation, imagine two companies. One is a small grocery store with a profit margin of 5%, and the other is a big software developer with a profit margin of 50%. If both companies make $1 million in sales and their state’s gross receipt tax is 1%, they would both owe $10,000. While that tax may not be a major burden for the big software developer since $10,000 is only 2% of its total profit, it is a whopping 20% of the small grocer’s gain! On top of this, both businesses have to deal with corporate and payroll taxes, adding onto the gross receipt tax’s already incredible burden.

Worst of all, gross receipt taxes are almost always accompanied by cronyism. Considering the magnitude of the tax, self-interested industries lobby their legislators for special privileges. Take New Mexico for example. Since the Land of Enchantment has the highest maximum gross receipt tax rate in the nation, its code is unsurprisingly littered with exemptions and deductions for businessmen such as farmers, miners, oilmen, stadium owners, filmmakers, and car salesmen. These industries are right to seek relief from the hefty tax, but it’s unfair and economically dangerous for the state to shift most of the tax’s burden onto the small businesses that drive much of the economy.

Instead, the best move state governments can make for both big and small businesses alike is to kill this bloodsucking beast once again. The best type of tax is one with a flat rate that affects every industry proportionately without exceptions. Gross receipt taxes have none of these qualities, making them one of the grossest antibusiness taxes that every sensible state should avoid.

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