In a recent article in State Tax News (subscription required) abridged in a UIUC press release, tax expert J. Fred Giertz explains that under Blagojevich’s gross receipts tax proposal small businesses who pay outside lawyers, accountants, and janitors would be subject to the tax on those services–but big businesses with their own in-house lawyers, accountants, and janitors would not. The exemption for firms with $2 million or less in yearly sales does little good; it’s a loophole that would, for instance, allow “a four-partner law firm with annual receipts of $7.9 million” to escape the tax by becoming four independent practitioners sharing an office.
A gross receipts tax would also encourage Illinois businesses to economize by buying from out-of-state vendors. (Buy plants from an Illinois vendor who bought them from an Illinois grower and they’re taxed twice.) This is bad news even if you don’t care about buying locally: the best taxes don’t distort economic activity beyond the minimum necessary.
Giertz’s assessment hasn’t garnered much attention. The Illinois Farm Bureau did reprint part of the press release but strategically omitted Giertz’s positive proposal:
“For the last five years,” he points out, “continuing state revenue sources have failed to cover expanding state spending.” As a result, Illinois “cannot pay all its current obligations with continuing revenues”–hence Blago’s repeated attempts at one-shot fixes–“and revenue growth in the future will likely not keep pace with expenditure needs because of the relative unresponsiveness of the state’s tax system. . . . A modest rate increase in the income tax (individual and corporate), accompanied by an increase in the exemption level to protect low-income taxpayers and the expansion of the sales tax base to include consumer services, would generate sufficient funds for the state to address its fiscal imbalance if the extra funds were accompanied by spending discipline.”
For the record, Giertz did serve on Republican Jim Edgar’s transition team. But he also has fingered Edgar’s political godfather, James R. Thompson, as the original culprit in the state’s ongoing failure to properly fund state employee pensions: “Gov. Thompson and the General Assembly chose to direct available state resources to other state programs rather than to pensions” back in the 1980s, Giertz said in 2005. “This was not an oversight, but a conscious policy decision,” and an expensive one.