Gross-Receipts Tax

My state of Illinois is thinking about instituting a 1% gross-receipts tax on businesses to pay for education.

I had never heard of this tax before, so its always interesting to find out about new things. It turns out that some states, such as Arizona, Ohio, and Texas, already have one.

Unlike a sales tax, a gross-receipts tax is paid by the company, rather than the consumer (though, of course, the tax will probably get passed on). The tax is levied on a company's total gross revenue, regardless of source.

One of the effects of this tax is to create a pyramid effect that increases the effective tax rate. For example, let us say that an engineering firm takes in $100,000 for a project. At 1%, they now pay $1,000 in tax.

Then, they pass $20,000 to a survey firm that assisted them on the project. The survey firm now pays $200 tax. $1,200 (or 1.2%) of the $100,000 has now been paid as tax.

The proponents of this tax say that economists agree that, all things being equal, its better to have a lower tax rate with a broad base, rather than a higher tax rate on a narrow base (even though they bring in the same amount of money).

Opponents say the tax hurts competitiveness, encourages vertical integration, and imposes different effective tax rates, depending on industry.