April 2, 2007
Study: IL Tax Plan Drives Up Prices for Small Business
Illinois Governor Rod Blagojevich has proposed a tax plan that exacts a hidden tax on all businesses regardless of size, according to a new study by the Tax Foundation.
"I'm not sure the Governor understands the negative impact his proposal will have on all businesses, large or small," says the author of the report, Chris Atkins. "They can claim that it is low-rate, or that it will exempt small businesses, but they aren't telling people that it will enact a stealth price increase."
Atkins illustrates how the tax is hidden by creating a hypothetical small manufacturing company with $1 million is gross receipts. In the example, the company pays over $10,000 in extra costs under the Governor's proposal, which results in a loss of over $5,000 in net profits.
"It's all because of the pyramiding effect of gross receipts taxes. Since you're not allowed to deduct your costs, the extra tax gets added on to the price of product at each stage in the production chain," he explains. "It might look like a few cents here and there, but when you're buying thousands of units, it starts to add up."
It works like this: A baker buys flour he needs to make cakes. But there are several stages between the time wheat becomes flour. It needs to be grown, harvested, shipped, and processed, and so on. At each of those stages, the different companies providing the necessary good or service add the cost of the gross receipts tax to the price of what they sell and pass it on to the buyer. By the time the flour is sold to the baker, the tax is already embedded in the price.
The baker will need several inputs - resources needed to create the final product - other than flour before he can create his cakes and pastries. The extra costs embedded into the price of inputs drive up the price of what the baker eventually sells.
Under more common business tax systems, expenses are deductible and do not factor into taxable income. There is no extra tax and therefore nothing to pass on to buyers.
In Atkins' example, even though the small business would avoid paying the gross receipts tax due to the Governor's small business exemption, the higher prices would result in more than $10,000 in higher costs - a one and a half percent increase in the cost of its inputs, or three times the statutory rate of the gross receipts tax.
Further, under Illinois' current business tax system the small business would pay $5,000 in corporate taxes. Under the gross receipts tax plan, they would pay nothing. Proponents of the proposal will no doubt tout it as "tax relief for small businesses."
However, due to the increase in the price of inputs the gross receipts tax has the net effect of reducing profits by $5,314. The business might pay fewer taxes, but the bottom line suffers as a result.
"This is why the gross receipts tax is so dangerous," Atkins says. "Small business, big business, any business. On the surface it looks like low rates and tax cuts, but it really means hidden taxes and lower profits."
See the full study at:
http://www.taxfoundation.org/publications/show/22306.html
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