Latest Post | Last 10 Posts | Archives
Previous Post: Election day thoughts and open thread *** Updated x5 ***
Next Post: Question of the day
Posted in:
* I’m not sure who I was talking to about this yesterday, but he or she made a pretty good point.
On the one hand, business opponents say that the governor’s proposed gross receipts tax will kill them off…
“To take another percent and a half or .8 percent off our gross receipts would just kill us,” Lamp said. “I think Illinois would lose a lot of business because of it.”
On the other hand, business says that the GRT would simply be passed along to the consumers in the form of higher prices…
“So it’s a cost that will compound that the consumer is going to end up paying for because the businesses don’t have that pool of funds built into their business model to be able to pay for a tax like that.”
On its face, this seems like a contradictory argument. Will it drive them out of business or will they just pass the added costs onto consumers? And it’s true that reporters ought to be pressing people a lot more on their answers, particularly when somebody like Chamber honcho Doug Whitley gives both scenarios at the same event…
“This will raise the price for goods and services in the state that all people pay for,” said Whitley, adding that firms with a profit margin of 2 percent or less could be put out of business if taxes rose by an average of 2 percent.
But it’s not as contradictory as it looks. Businesses don’t just sell goods and services to end-user consumers, but to other businesses, who then sell down the chain. They probably can’t eat all the costs, so some will be passed along, causing other businesses’ costs to rise, which then are partially eaten and partially passed along.
I’m still not convinced that, in the end, this will be the huge business-killer that some are making it out to be, but the seemingly contradictory logic does make some sense, even if the opponents aren’t being completely clear and truthful.
By the way, Caterpillar announced that the GRT won’t run it out of the state, so that argument can be kissed goodbye. Still…
Tim Elder, director of corporate public affairs for Caterpillar Inc., said that as a $41 billion business, it wasn’t likely Caterpillar would be driven out of the state, but he expressed concern about smaller suppliers.
* More tax and spend updates, compiled by Paul…
* Dueling reports praise, criticize governor’s healthcare plan
* Businesses rally to oppose GRT
* Business wary of Blago tax plan
* Dillard challenges Blagojevich’s proposal
* Cindy Richards: It’s time to act on education, health insurance
*** UPDATE *** A new press release from the realtors uses the “It’s gonna hurt consumers” argument, so therefore assumes everyone in every step of the building/selling process will be subjected to the GRT and will also pass along the full amount of the tax…
A study released today by the Illinois Association of REALTORS(R) (IAR) shows that the accumulated or “pyramid” effect of the Gross Receipts Tax proposed by Governor Blagojevich would add $8,853 to the cost of an average new home in the nine- county metropolitan Chicago region. […]
The first phase of the study, conducted for IAR by RCF Economic & Financial Consulting, Inc. of Chicago, calculated the pyramid effect of five stages of construction and marketing of a new home in Illinois based on a 1.95 percent GRT on services and a .85 percent tax on construction contracts and materials, as proposed in the Governor’s budget. The stages are: wholesaler, subcontractor, general contractor, developer, and finally consumer. RCF calculated an overall 2.84 percent increase in the cost of a new home as a result of this layering on of new taxes at different steps in the homebuilding and selling process.
posted by Rich Miller
Wednesday, Apr 18, 07 @ 9:15 am
Sorry, comments are closed at this time.
Previous Post: Election day thoughts and open thread *** Updated x5 ***
Next Post: Question of the day
WordPress Mobile Edition available at alexking.org.
powered by WordPress.
I got a hoot yesterday from the “dueling reports” story in Crains. Some duel!
One report is from a “health care group” - gee, I wonder how they would feel about the governor’s plans?
The other is from The Tax Foundation and addresses the GRT tax, not how the money would be spent.
Blagojevich wants to convince us that politics trumps reality. If he can create a great political reason to raise our taxes than raising our taxes would be a good thing. What he and his supporters are denying is the reality that says you can only take so many taxes out of state businesses before they start failing due to competition. The reason for the tax increase doesn’t matter.
The Governor wants us to see the a big delicious Shepherd pie. What he refuses to see are the bodies of the Shepherds lying in the kitchen he had to knock off to make that pie.
Blagojevich is a campaigning politician - and good at that - but regarding fiscal policies and taxes - we need a governor who understands reality.
Comment by VanillaMan Wednesday, Apr 18, 07 @ 9:32 am
And no, there is no contradiction.
This is a price driven marketplace - if you are forced to raise your prices while your competition doesn’t - you are dead.
Comment by VanillaMan Wednesday, Apr 18, 07 @ 9:35 am
Not that I’m usually defending big business, but both scenarios can be true at the same time.
Businesses that can be replaced by out-of-state businesses that don’t have the extra cost could be threatened.
And businesses that don’t have to fear out-of-state competition, like restaurants, would pass along costs to consumers.
Comment by Carl Nyberg Wednesday, Apr 18, 07 @ 10:05 am
Why won’t the governor grow up, and sit down and talk with the leaders and come up with a plan that would actually be good for Illinois? Why this my way or the highway stunt? I don’t think he has a snowballs chance in August of making it happen, and I am willing to bet that MJM can be every bit as stubborn.
Comment by leigh Wednesday, Apr 18, 07 @ 10:39 am
Once again, Illinois is already a low-tax state.
Comment by Squideshi Wednesday, Apr 18, 07 @ 10:46 am
Rich-
The two answers you cited were not necessarily contradictions. The answer to your question varies by industry, because each industry is different and would be impacted by the GRT in its own way. Farmers, for example, sell commodities with prices tightly controlled by national market conditions. Therefore, farmers would not be able to pass the increased cost of production on to consumers. The same would also be true to another extent for banks (Credit unions would be exempt as not-for-profit entities.). Those selling other commodities (groceries, gasoline) operate under different pricing pressures and would likely pass at least most of the GRT on to you and me. Grocery prices, for instance, would rise about 17 percent (according to the Illinois Manufacturers Association).
It’s good that Caterpiller won’t be driven out of the state, but by how much will they have to slash their work force or reduce fringe benefits? I’m worried about towns like Decatur. If ADM left town, it would be game over for that town.
Comment by Drew Wednesday, Apr 18, 07 @ 10:47 am
I say just close the corporate tax loopholes and allow no new programs or taxes until the state can support the current programs. Cut the pork!!!
Comment by i d Wednesday, Apr 18, 07 @ 11:34 am
Rich:
At a hearing on Monday sponsored by Reps. Bellock, Biggens, Durkin, and Pihos, travel agency owners testified how their business operate within very narrow margins. If they try to pass along the GRT, agencies in other non GRT states will offer better prices and the Illinois agency is at a competitive disadvantage.
Comment by one of the 35 Wednesday, Apr 18, 07 @ 11:50 am
Two thoughts.
Uno. Why does all the blather about the GRT sound SOOOOOOO very much like the endlessly recurring tired wretched utterly baseless Chicken Little sky-is-falling arguments about the minimum wage?
Yeah. “Raise the minimum wage two bits and every business in the universe will go broke.” Sure. FDR/New Deal types put in the minimum what?, about seventy-years ago? Sky hasn’t fallen yet.
Bump the minimum wage a little every now and then and it seems to pass right through to the retail prices of burgers or burritos or whatever. I (for one) ain’t got no problem with that.
Chapter 7 filings don’t seem to spike. Businesses don’t seem to flee offshore (or out of state) in droves. The wealthy don’t seem to have to give up their BMWs and Lexuses every time they have to cough up an extra twenty-five cents (or whatever) an hour for their help.
Ditto that with the GRT. Just watch.
Numero dos. The GRT is mostly an exercise in economic dislocation.
Analogy of the day: it’s much like squeezing toothpaste around in the tube.
Some toothpaste comes out when you squeeze (that’s the point, right?). But most of the action is where the toothpaste moves inside. Some parts of the tube end up with more, and some with less. Hence all the current whining.
Some folks have had it pretty doggone good in aggregate with Illinois taxes over the years (i.e., one of the lowest income tax rates in the nation, right?)
So fine. Time to squeeze out a modest ribbon of toothpaste. We’ve been playing games with the books in this state way too long (e.g., shorting schools and transportation and pensions).
(Me, I’d rather skip the GRT — which I think is too regressive — and move instead to a progressive income tax that steadily scales up on the well-to-do. But me, hey, what do I know.)
Outta here.
Comment by Dooley Dudright Wednesday, Apr 18, 07 @ 12:02 pm
If the GRT passes I will be without my endless supply of beef and pork, because smaller operators will shut down. If ADM ever left Decatur what would Central Illinois do without the constant smell of soy. Also to Dooley’s point, while overall business closings across the US may not fluctuate when a minimum wage increases, you do see small businesses close becasue they are not able to compete with larger chains that can absorb overhead. I don’t normally give much praise to Democrat’s but to the Treasurer’s credit he seems to advocate for government that works like business. If only he were heard louder in the party circles instead of the tax & spend leaders we have in Chicago.
Comment by 6'2" Yeti Wednesday, Apr 18, 07 @ 12:14 pm
The realtors piece also ignores the fact that the vast majority of realtors are uninsured, unless they have insurance from their spouse.
My realtor was ecstatic about the possibility of being able to buy insurance through a big pool. Nobody at his office has insurance on their own because it would have cost them about $10,000-$15,000 a year to get it on their own.
Comment by steven Wednesday, Apr 18, 07 @ 2:19 pm
Illinois is NOT a low tax state. On average, 33.2% of our income goes to government. 14th HIGHEST in the US. Adding another $675 worth of tax burden to every man woman and child in Illinois, which is what Blago’s tax hike does, will put Illinois as the 9th highest tax paying state in the US. If you want half of your income to be spent by corrupt politicians instead of “only” 33%, then I suppose Illinois is a low tax state. Otherwise, dream on, everyone in Illinois is already paying too much in taxes for the actual benefits they receive for it.
The other commenters are correct, it isn’t an either or proposition on passing on costs or going out of business. Some businesses will pass along the costs and some of them will go out of business because they did, some businesses will fire employees, some will reduce benefits, some will freeze wage increases, some will move out of state, some will go out of business, most will do a combination of things to try to get back to the level of profitability they had before the tax hike.
And Caterpillar essentially left Illinois years ago with their good paying manufacturing jobs that my dad enjoyed for 38 years. Bad government and the greedy unions drove them out in the 70s and 80s and their kids generation is suffering for their greed.
Comment by Jeff Trigg Wednesday, Apr 18, 07 @ 2:35 pm
Illinois is lots of businesses. (We should have far more of them.) They’ll react differently.
Those who can pass GRT onto consumers, will.
Those that can’t, will squeeze it from Labor; or somehow become more productive.
Those who can’t will quit Illinois or go bust.
Today’s Populist Liberalism is in a paradox of squeezing labor to pay for the benefits.
Comment by Bill Baar Wednesday, Apr 18, 07 @ 2:45 pm
I believe that Doug Whitley is on record as saying that 55% of the GRT tax increase will be passed on to end consumers.
Comment by Yellow Dog Democrat Wednesday, Apr 18, 07 @ 3:27 pm
Doug Whitley is on the record saying a lot of things.
Comment by steven Wednesday, Apr 18, 07 @ 3:44 pm
I, for one, will watch every penny I spent if this ridiculous tax is passed. When I can’t pay my bills, I stop spending. The people who run the state of Illinois should take that to heart.
If you need a tax that will provide lots of money for altruistic reasons like health care and education, make our Illinois income tax a flat tax for all, with no exceptions.
I already do a lot of business with my precious dollars on the Internet - lots of site have no tax and free shipping - and this will only increase as our state government tries to make me a pauper while protecting those who have more than enough.
Comment by Disgusted Wednesday, Apr 18, 07 @ 5:48 pm
I had a five minute conversation with an owner of a service business in the Loop. This person expects to go out of business. BUT, as far as I could tell, this owner has done no –zero- research on what the GRT would do to his business. His reaction is totally based on the news.
I pointed out that every one of his competitors will also have to pay GRT. That didn’t matter.
My guess is that there are not a lot of brain cells being used to evaluate the proposal and that’s particularly sad because there are surely useful amendments/revisions to be suggested but the knowledgeable people are too busy feeling sorry for themselves.
Comment by RBD Wednesday, Apr 18, 07 @ 7:29 pm
What about economic development and job creation? Whether you think the GRT will force businesses to close or not, one can’t possibly expect businesses to grow or move to Illinois. What business is gonna say, “Yeah, let’s go to Illinois, it’s great. They have a tax on our gross receipts and pols who really know how to spend their dollars wisely.” It’s not just about what will happen to businesses already in Illinois, it’s about destroying any incentive a business might have to expand or relocate in Illinois.
Comment by Gene Parmesan Wednesday, Apr 18, 07 @ 8:36 pm
I’ve posted before, and I apologize for repeating, but I’m starting up a bio tech firm with four other investors (a majority of which are Illinois citizens). Our board includes a former Fortune 100 executive who’s a resident of Illinois. And our technology was developed by a group of PHd’s from Midwestern Universities.
The company is being incorporated in Missouri and will operate out of there.
You can consider it a victim of 4 years of Gov. B’s anti business rhetoric and actions. We decided not to wait for the outcome of the GRT. The fact that the GRT is even being considered is evidence enough that Illinois is not business friendly.
Comment by Bio Tech owner Wednesday, Apr 18, 07 @ 10:05 pm
(I’m not advocating for or against the GRT; I just wish there was more thoughtful analysis by decision makers and press critics.)
In a former life I worked for jumbo corporation on both coasts. The quantity of quality employees and the overall quality of life for any execs that might have to relocate were the critical facts in the decisions to open an office/plant in a new area.
If companies don’t choose IL it will because we don’t have the employees they need. (The benefits of the Chicago area trump anything offered by most other states.)
Comment by RBD Wednesday, Apr 18, 07 @ 10:10 pm
—The company is being incorporated in Missouri and will operate out of there.
—-You can consider it a victim of 4 years of Gov. B’s anti business rhetoric and actions. We decided not to wait for the outcome of the GRT. The fact that the GRT is even being considered is evidence enough that Illinois is not business friendly.
How is Missouri Business friendly?
Crappy roads, crappy educational system, a public university system that is mediocre to begin with and now falling further behind, and a resistance to funding any biotech facilities at universities because at some time in the future it ‘might’ be used for embryonic stem cell research.
Making matters even more fun, the two states were rated nearly identical for small businesses. Illinois has a slightly higher business income tax rate, but half the rate on personal income and the business income tax rate will be zeroed out.
If Illinois does get universal care it should help you lower your costs and you’ll have better infrastructure, less government regulation on what you are researching given Missouri’s attempts to highly regulate the field, and fewer high quality workers.
Kansas City and Saint Louis are largely stagnant economically and population wise and the venture capital sources are damn near non-existent.
So move and pretend you are moving to a more business friendly place, but the reality is far more complex. You want cheap labor that is untrained and a very conservative investment environment with bad roads move to Missouri.
Comment by ArchPundit Wednesday, Apr 18, 07 @ 10:31 pm
There is certainly no contradiction in claiming that a tax that is mostly passed on to consumers will also hurt one’s business. As Drew pointed out, some businesses are put at a competitive disadvantage to other business that offer similar products but aren’t affected by the tax (e.g. credit unions v. banks). Others simply can’t afford to pass most of the tax on to consumers due to the fact that they operate in a tightly controlled national or international market. In these cases, business -such as farms-are often so burdened by tax increases, which they can’t pass on, that they must quite simply go out of business. Furthermore, let us not forget that IL communities on the border of more tax friendly states (which if the GRT passes would be every border state) would be hit especially hard. In the Quad Cities, for example, Illinois businesses such as restaurants and law firms that in other communities would be able to pass on the GRT tax without too many adverse effects would lose business to competitors in Iowa. Why would you build a new Chilis in Moline when you could put one across the river and not have to pay onerous taxes?
Comment by 5'8" overweight gunnut Thursday, Apr 19, 07 @ 10:38 am