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1 John L. Mikesell, Gross Receipts Taxes in State Government Finances: A Review of Their History and Performance 1 (2007)

handle is hein.taxfoundation/bpfdxz0001 and id is 1 raw text is: January 2007, Number 53 Gross eceipts Taxes in State Government Finances: A eview of Their istory and Performance By John L. Mikesel, Indiana University Executive Summary Gross receipts taxes had largely disappeared as an important revenue source for state govern- ments by the later years of the twentieth centu- ry usually after considerable effort by state business groups to eliminate them. Analysts and scholars presumed that these taxes-also known as turnover taxes-had forever been replaced with options that made more sense as ways of distributing the cost of government and had less undesirable impact on the taxpaying public, including businesses, and generally lost interest in them. In recent years, however, such broad-base, low-rate taxes have again entered state tax policy discussions. With this re-emer- gence comes a need for a new analysis of gross receipts taxes to aid policymakers who are unfa- miliar with their structure and drawbacks. This examination of American and European experience with gross receipts taxa- tion has identified several significant conclu- sions about the tax. These may be summarized: Broad base: The gross receipts tax base can be broad, broader than the total value of produc- tion of the economy, but it lacks any link either to capacity to bear the cost of goxernment serv- ices or to the amount of government services used-the normal standards for assigning tax burdens. Low rate: Whether a gross receipts tax has a low rate depends on how much revenue the government intends to raise from it. Unlike most taxes, the effective rate of a gross receipts tax is higher than the statutory (or advertised) rate. A broad-base, low-rate gross receipts tax is unlikely to contribute a major share of tax rev- enue to a modern state government. Stable revenue: A gross receipts tax appears to be roughly as stable as a retail sales tax. Its vari- ations do not contribute to the overall stability of total state revenue because its fluctuations follow generally the same pattern as other major taxes. Economic neutrality: A gross receipts tax interferes with private market decisions. Its pyramiding creates a haphazard pattern of incentives and disincentives for business opera- tions. Most significantly it establishes artificial incentive for vertical integration and discrimi- nates against contracting work with independ- ent suppliers and the advantages of scale and specialization that production by independent firms can bring. Joi- L. Mikesell is a pmfesso, of public i, ace atd policy a alsis ad diector o de N s e Of Public Affhc s program at the In.diana nie zsity Sbchool o' Pubci and Environmental Af'irs. Ie hias pibishd nl. m articles in sles and propery taxa- tion and his puJblic fhnanice textbook is wiely uJscd in gradonate puJblic administration t, ym KW 'ND 14 4

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