Gov. Blagojevich considering major new business tax

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Associated Press Writer SPRINGFIELD - The biggest overhaul of Illinois taxes in decades could be on the agenda when Gov. Rod Blagojevich delivers his State of the State address and budget proposal Wednesday. The administration is considering a call to create a new tax on business transactions - a &#8220gross receipts tax.” It could be coupled with a move to end the state's corporate income tax. The tax would generate billions of dollars without taking money directly from voters' wallets the way an increase in income or sales taxes would. Still, it could end up being the single biggest tax increase in Illinois history. Business groups are already gearing up to fight the idea if it surfaces, arguing that it would hurt the economy and, indirectly, consumers. &#8220It will show up in higher prices at the grocery store,” said David Vite, vice president of the Illinois Retail Merchants Association. &#8220It will show up at the hardware store. It will show up at the clothing store.” A gross receipts tax is basically a tax on every transaction businesses made. Consider the process of taking corn and getting it to the grocery as a bag of chips. The farmer buys the seed and chemicals to grow the corn. A processor buys the corn and mills it. A chip-maker buys the corn flour and other ingredients it needs. A grocery store then buys the finished chips. Every sale in that chain from field to shelf would be subject to the gross receipts tax, in addition to any sales taxes that already apply. The tax would also apply to business transactions not covered by sales taxes, such as legal services. Essentially, every time a business takes in money, it would have to pay the gross receipts tax. Because it applies to so many transactions, the tax rate can be low - 1 percent or less - but still generate large amounts of money. The administration won't confirm that a gross receipts tax will be part of the governor's budget proposal. But Vite said the governor's aides have talked to him about the possibility, and lawmakers say they've been told it's under consideration. What Blagojevich's aides will say is that the current tax system is unfair because some major companies end up paying little or nothing. &#8220It allows large corporations to use tax loopholes and avoid paying a penny in state income taxes. This system must be changed if we are to address the state's ongoing education and health care needs,” said Becky Carroll, deputy chief of staff. According to the state Revenue Department, 88 percent of the state's income tax comes from individual taxpayers and only 12 percent comes from corporations. In the 1970s, the mix was 80 percent from individuals and 20 percent from corporations. The department also says 99 of the nation's top 100 businesses file tax returns in Illinois but 37 of those corporations end up not owing any state income tax at all. So Blagojevich could frame a new tax as a way to make sure businesses pay their fair share to support Illinois government. Business groups see all kinds of problems. Businesses would be forced to choose between taking the extra cost out of their sometimes-slim profits, passing it on to customers or cutting other expenses, such as jobs. Companies would also have an incentive to buy supplies and ingredients from out of state. Why, opponents ask, would Caterpillar buy a tractor part from an Illinois supplier if it could buy the same thing in another state and avoid the gross receipts tax? If a gross receipts tax does surface, the governor's aides say, it could be tailored to minimize the impact on traditional Illinois businesses, such as manufacturers, and small businesses. Some types of businesses could be left out of the tax. Or businesses below a certain revenue level could be exempt. Business groups remain skeptical, however. Even exempt companies would do business with companies that pay the tax, potentially raising prices for everyone. &#8220I think the proposal will be extremely disruptive to the economy of Illinois even if there are huge exemptions,” said Douglas Whitley, president of the Illinois State Chamber of Commerce. He argued consumers ultimately will end up paying the tax without realizing it - something that Whitley sees as violating the idea that people should have a clear idea of what government costs and whether they're getting their money's worth. Few other states have a gross receipts tax. Washington has had one for decades. It's a complex version with many different rates and exemptions depending on the type of business. Indiana dropped its gross receipts tax in 2002. Business groups in other states have sometimes gone along, grudgingly, with imposing a gross receipts tax. Ohio and Texas each approved one in recent years as part of a plan to drop other taxes that businesses disliked even more. One tax expert, John Mikesell of Indiana University, calls it a &#8220stealth tax” that has no relationship to a company's ability to pay and creates an incentive to do business in other states. &#8220There is no sensible case for gross receipts taxation,” Mikesell wrote in a report for the Tax Foundation, a national organization that favors lower taxes. But Doug Kane, a consultant for the Blagojevich administration, said all taxes have drawbacks. The question is how the gross receipts taxes compares to other possibilities. He argues that it's a good choice because it's simple and applies so broadly that the rate can be kept relatively low. Blagojevich campaigned for a second term by promising not to raise taxes - sometimes specifying the income and sales taxes and sometimes not. The idea of a gross receipts tax never came up. But the Chicago Democrat wants a major expansion of state health care programs and new spending for schools. He already faces a budget deficit of roughly $2 billion and climbing expenses for next year. He and many state lawmakers want to find more money somewhere. Estimates of the revenues from a gross receipts tax start at $5 billion and go up from there, even if accompanied by elimination of the corporate income tax, which generated $1.5 billion in 2005. By comparison, Illinois took in only $1 billion in 1971, the first full year of its new income tax. An income tax increase in 1991 generated about $700 million a year.