States’ latest weapon in the struggle for revenue: gross receipts taxes
A gross receipts tax by any other name is still a gross receipts tax – and it goes by a number of different names in the various states that have enacted it.
Ohio calls its GRT the commercial activity tax, or CAT, Texas calls the state GRT a franchise tax or margin tax, Washington named its GRT the Business and Occupation Tax, and Nevada’s GRT is the Commerce Tax. And although New Mexico has a GRT, its characteristics are more similar to a broad-based sales tax, according to Joyce Beebe, a fellow in public finance at Rice University’s Baker Institute for Public Policy.
“While some states see a GRT as a revenue enhancer or a simpler alternative to the corporate income tax, most economists see it in a negative light because of tax pyramiding,” she said.
“Pyramiding occurs when products and services are taxed each time they are purchased and sold by subsequent firms during the production process,” she explained. “The tax thus becomes part of the base in each subsequent sale, and final purchasers pay a higher tax because of the repeated taxation of the same inputs,” she said.
Although pyramiding is the GRT’s major flaw, it is not unique to the GRT, Beebe observed: “Certain states that impose retail sales taxes on B2B transactions also face the risk of pyramiding. For example, about 35 percent of Connecticut’s 2014 retail sales taxes came from B2B transactions. New Mexico’s GRT taxes B2B transactions but provides ‘chain of commerce’ deductions similar to those under a VAT,” she said.
“Because of the lack of deductions for business-to-business sales and the repetitive tax levy at each stage of production, the effective tax rate on final sales under the GRT is higher than the statutory rate,” she said. “It could also be different for similar goods, depending on the number of taxable intermediate transactions in the production and distribution process.”
In 2017 Oregon, Oklahoma, Louisiana and West Virginia sought to enact GRTs to replace their obsolete tax systems and improve revenue, Beebe noted. “Although none of the proposals were implemented, Oregon has suggested that it might propose creating a GRT again in the next legislative session, and West Virginia’s proposal was approved by the legislature but ultimately not enacted,” she said.
Despite its flaws, the GRT is viewed as superior to the corporate income tax by certain state lawmakers, Beebe indicated. “The GRT includes more types of businesses – C corporations, S corporations, limited liability companies, partnerships, etc. – in the tax base, as opposed to only C corporations. The CIT base has been shrinking because of the increasingly popular LLCs, which has reduced the number of C corporation formations. Moreover, a GRT would tax service-sector businesses that are often organized in non-corporate forms and therefore are exempt from the CIT.”
“Regardless of which business tax a state decides to implement, the overarching characteristics that are desirable are clear,” according to Beebe. “The tax should be a broad-based, low-rate tax that has limited pyramiding and does not create many tax avoidance opportunities,” she said. “After such a tax is enacted, states need to avoid the pressure to erode the tax base over time, either by offering concessions to specific industries, excluding particular groups or providing incentives for certain activities. Without ongoing maintenance, the shrinking tax base will necessitate rate increases to bring in the same amount of revenue, and the modified tax may eventually look like the CIT today.”