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1 Garrett Watson, Resisting the Allure of Gross Receipts Taxes: An Assessment of Their Costs and Consequences 1 (2019)

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Resisting the Allure of

Gross Receipts Taxes:

An Assessment of Their Costs


FISCAL
FACT
No. 634
Feb. 2019


The Tax Foundation is the nation's
leading independent tax policy
research organization. Since 1937,
our research, analysis, and experts
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©2019 Tax Foundation
Distributed under
Creative Commons CC BY NC 4.0
Editor, Rachel Shuster
Designer, Dan Carvajal
Tax Foundation
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and Consequences


Garrett Watson
Special Projects Manager



Key Findings

   Gross receipts taxes, also known as turnover taxes, have returned as
     a revenue option for policymakers after being dismissed for decades as
     inefficient and unsound tax policy. Their appeal comes as many states are
     looking to replace revenue lost by eroding corporate income tax bases and as a
     way to limit revenue volatility.

   Taxes on gross receipts are enticing to policymakers because the broad tax
     base brings a large, stable source of revenue to state governments. Proponents
     argue that gross receipts taxes are simpler to administer and calculate than
     corporate income taxes.

   Business-to-business transactions are not exempt from gross receipts taxes,
     which creates tax pyramiding. The same economic value is taxed multiple
     times-once during each transaction through the stages of production-which
     compounds the tax's negative economic effects.

   Gross receipts taxes impact firms with low profit margins and high production
     volumes, as the tax does not account for a business' costs of production.
     Startups and entrepreneurs, who typically post losses in early years, may have
     difficulty paying their tax liability.

   Gross receipts taxes impose costs on consumers, workers, and shareholders.
     Prices rise as the tax is shifted onto consumers, impacting those with lower
     incomes the most. Some firms may lower wages to accommodate the tax,
     reducing incomes.

   Efforts to mitigate the negative effects of gross receipts taxes, such as creating
     multiple rates for different industries, often increase the tax's complexity,
     negating one of the primary reasons given to enact the tax.

   States should consider alternatives to gross receipts taxes given their economic
     distortions, their opacity, and their complexity in practice. Well-structured
     sales taxes can provide reliable revenue with fewer economic costs.

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