The Destructive Impact of a Gross Receipts Tax
- Wednesday, January 1, 2003
No state but Washington uses a gross receipts tax (GRT) as a major, broad-based source of income. It has been otably unpopular in those cities and localities where it has been implemented. Even in Washington, there is bipartisan consensus that the GRT has become a seriously destructive factor in the economic life of that state.
Because of the pyramiding effect of a gross receipts tax, Nevada's products and services would be at a competitive disadvantage against those from other states. The tax would encourage businesses to leave Nevada and locate elsewhere.
Because a GRT is payable even when there are no profits, it puts extra negative pressure on startup businesses. Furthur, even when businesses are operating at a loss, they must pay the tax. Thus a GRT would make Nevada recessions and joblessness harsher than otherwise. A GRT would operate like a general depressant across the Nevada economy, as virtually all businesses would now have heavier costs. The taxes extracted from the private sector would mean a net reduction in private sector demand for production factors — such as employees. More of the state economy will thus be controlled by Nevada's political class and its favored rent-seekers. A GRT, therefore, would mean more government waste.
It would also require the establishment of a state IRS — as a GRT requires a huge bureaucracy of investigators and auditors to not only enforce a vast volume of rules and regulations but also to deal with a uniquely high rate of taxpayer evasion. In Los Angeles reputable estimates put non-compliance as high as 40 percent of firms obligated to pay the city's GRT.
Revenue estimates coming out of the Governor's Task Force on Tax Policy are almost certainly over-optimistic. Most likely, the actual rate of a Nevada GRT would have to be raised almost immediately — and significantly above the .25 percent task force figure.
But implementing even that would be to put all businesses considering moving into Nevada on notice that the future here is likely to be one of higher corporate taxes — of always-increasing complexity. Nevada's entire economic diversification campaign would be a serious casualty.