Still gross

The Gross Receipts Tax remains a horrible idea.

By Steven Miller
  • Friday, January 11, 2008

The Nevada special interests that regularly plump for a “broad based business tax” always couch their advocacy in the language of good public policy.

It’s interesting, therefore, that the particular tax they’ve worked hardest for — a statewide gross receipts tax — is actually one of the worst public policy choices conceivable, according to non-partisan public finance experts.

This raises an interesting question. If we assume that Nevada’s fans of the GRT, as it is called, actually know something about this tax, why does it so attract them?

Some new white papers from the non-partisan Tax Foundation in Washington, D.C., may hold the answers.

The nationally esteemed Dr. John Mikesell, Professor of Public Finance and Policy Analysis at Indiana University, is one author. After recounting the history of gross receipts taxes from the 13th Century to the present, Mikesell draws a devastating conclusion.

“No sensible case can be made for imposing gross receipts taxes in the modern economic environment,” he writes. “Gross receipts taxes should never be seen as an element of positive tax reform. They were abandoned for good reason.”

Andrew Chamberlain and Patrick Fleenor, economists at the Tax Foundation, highlight the GRT’s basic problem.

“While well designed sales taxes apply only to final sales to consumers,” they explain, “gross receipts taxes tax all transactions, including intermediate business-to-business purchases of supplies, raw materials and equipment. As a result, gross receipts taxes create an extra layer of taxation at each stage of production that sales and other taxes do not— something economists call ‘tax pyramiding.’”

As a result, note the economists, “Gross receipts taxes suffer from severe flaws that are well documented in the economic literature, and rank among the most economically harmful tax structures available to lawmakers.”

Atop the list of ways that GRTs harm the jurisdictions that adopt them is the tax’s covert attack on citizens’ right to know. Chamberlain and Fleenor explain:

A basic principle of good tax design is that taxes should be transparent to taxpayers. Just like consumers need information about prices to make good buying decisions in the marketplace, taxpayers need good information about the “price” of government programs in order to make good choices about the level of spending they demand from elected officials.

However, GRTs completely violate this principle. At each level of production the tax’s economic burden gets folded into the price of the product or service at the next level. This pyramiding continues all the way through the production process until, at the final retail level, the consumer who contemplates purchasing a business product or service has no way of knowing how much of the final price is actually hidden taxes.

“Imposing nontransparent taxes that disguise the true cost of spending programs may be politically advantageous to lawmakers,” note economists Chamberlain and Fleenor, “but in a democratic society that requires informed citizens, it is poor tax policy.”

Mikesell makes a similar point: “A gross receipts tax is a stealth tax with its true burden hidden from taxpayers…. Hiding the cost of government is inconsistent with efficient and responsive provision of government services and contrary to the fundamentals of democratic government.”

Thus, a gross receipts tax is an optimal way of empowering predatory politicians and other interests that feed off of taxpayers, because it disempowers taxpayers. In Nevada, of course, stealth taxation is an old story. As a forthcoming Nevada Policy Research Institute study will show, for over a generation this has been the M.O. of the state’s politically dominant special-interest coalition.

However, recently that coalition’s enabling alliance — the strange cohabitation of the old-line Strip megacasinos and state teacher union bosses — has hit the skids. Voracious for more boodle from taxpayers than the pact’s current schedule of predation produces, teacher union operatives recently turned on their old allies, targeting them and other gamers, too, for a savage 44 percent tax hike.

In this context the loud, continuing support by the Nevada Resort Association and high-profile executives of the MGM-Mirage empire for a “broad-based business tax” — read, gross receipts tax — becomes more intelligible. It is a plaintive, coded cry to the teacher union: “Please come back. We can do it all again.”

To the larger Nevada business community, however, it resembles nothing so much as an expression of clueless imperiousness.

“Please help us re-establish the old status quo,” it says.

“You know, the situation where — legislature after legislature — we get to rule the roost, but you regularly get sold down the river.”

Steven Miller is policy director at the Nevada Policy Research Institute.

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