The economic harms of the gross receipts tax (GRT) were well understood by the early 20th century. Not only is the tax inequitable, but it is also inefficient and distortionary. That is why most states abandoned GRTs in the early 1900s, as states developed the capacity to administer less harmful taxes. Unfortunately, some policymakers in Massachusetts want to turn back the clock.
Today, only a handful of states levy any variation of the GRT. Those that still rely on them as a significant source of revenue (like Texas, Nevada, Ohio, and Washington) typically do so in lieu of one or more alternative taxes. None of these states imposes a corporate income tax, and Ohio repealed several other business taxes as well when it adopted its GRT.
Some Massachusetts policymakers, however, want to layer a GRT atop the state’s existing corporate income tax. If H.2855 becomes law, it would reduce the competitiveness of the Bay State and increase prices for consumers on already expensive goods and services. To make matters worse, Bay Staters would be asked to shoulder the added tax burden at a time when inflation is already eroding purchasing power at a rate not seen 1982.
It’s hard to say which of these is the “worst,” but the 2.3 percent gross receipts tax sticks out. That gross receipts taxes are an awful way to structure a business tax is one of the few things that tax policy experts across the political spectrum almost universally agree on. That’s because they make no allowance for the large variance in profit margins that different types of businesses make—whether a business has a profit margin of 0.1 percent or 10 percent, it would still have to pay the same percentage of its total revenues.
That’s a problem with any gross receipts tax, but California’s proposed tax would exacerbate this inherent problem with a rate that is three times the level of the nation’s current highest. The higher the gross receipts tax rate, the more low-margin businesses that could be put in a position where operating in California would lose them money.
Almost as bad is the proposal to institute a payroll tax on businesses with 50 or more employees. Not only are payroll taxes a regressive tax (even if the tax is imposed on the employer, it would be passed on to employees in the form of lower wages), but the 50-employee threshold would create an obvious disincentive for businesses to hire their 50th employee.