Wednesday, April 25, 2007

Medicaid Bills and the Gross Receipts Tax

This Month Governor Blagojevich missed the chance to pay 650 Million dollars in Medicaid bills that the State owes to health care providers, on April 4 the Illinois Comptroller office sent a letter to the head of Department of Healthcare and Family Services indicating that they would pay the bill if the DHF would forward them the invoice, DHF not only did not send them the invoice, but it did not respond at all to the letter from the Comptrollers office. What this all means is that health care providers in Illinois will not be paid on time again and this along with the Illinois history of not paying its Medicaid bills in a timely fashion or completely means that health care providers will have yet another reason not to accept patients on Illinois Medicaid. Several months ago to major health care providers in the Midwest announced that they will no longer accept Illinois Medicaid patients or people in the Governor’s All Kids program and this will just give more incentive for others to follow. There are some rumors that the reason for this is that Governor Blagojevich is trying to put the squeeze on the health care providers in order to try and black mail them into support his new taxes and health care programs. Essential it would seem what he is saying to health care providers is back my health care and associate tax increase or else no one is going to get paid. The other question is if Illinois can not pay it Medicaid bills on time as it is and the system is badly mismanaged, as most people would agree, why in the world would we want to add another expensive health care program to the state rolls?

Fred Giertz a professor of economics at the University of Illinois called Governor Blagojevich’s proposed Gross Receipts Tax an overreaction and stated that it would have cascading effect, tax good multiple times as they move through the economy. This cascading effect means that the actual amount that would be paid to the State through the Gross Receipts Tax would be fair higher the stated rate of 1.95% on service and .85% on manufactured goods. For example if you had a good that went goes through 5 production stage before being sold to the consumer you have something like this for a manufactured good.

Stage Price Tax

1 $10 $.09

2 $15 $.13

3 $17 $.15

4 $20 $.17

5 $25 $.21

So in the end the tax paid would $.75 or 3% of the goods final cost, while 75 cents seems small, when you multiple this through million of goods and services sold each year in the state, the amount ended up much larger. This assumes that none of the cost of the tax is passed on but lets see what happens if 50 percent is passed on with the same set.

Stage Price Tax

1 $10 $.9

2 $15.04 $.13

3 $17.10 $.15

4 $20.17 $.17

5 $25.25 $.22

So with 50 percent of the tax being passed on we see that the amount that the State takes in increased slight and the price paid by the consumer rise be 25 cents or 1 percent. This is small for a good like this you have to remember on a 20,000 dollars care this would lead to increase of 200 dollars. When you multiple this effect through all of the goods and service in the Illinois economy you’re talking about billion dollars. The amount of money that would be lost to the consumer in aggregate would be about equal to the amount that State takes in through the tax.

Monday, April 23, 2007

Plans to hide the cost of the Gross Receipts Tax

Before I have talked about how most of the cost of the Gross Receipts tax will be passed on to consumers in the from of higher prices, it seems that Governor Blagojevich is well aware of this because hidden in his proposed bill is a passage that would make it illegal for business to place the cost of the tax on an bill to their costumers. While there are of course numerous federal, state and local taxes and regulation are passed on to the consumer in the form of higher prices for goods and services that are not itemized and presented to the consumer but are hidden, this is the first time that I know of that a bill would explicit make it illegal for a business to tell a consumer how much of the cost of good is the product of a specific tax. It would be the same as if the governments forbid telecoms or utilities from putting on their bills how much was being paid because of taxes. I don’t think that business would itemize their bills enough to include the Gross Receipts tax either way, it would just show as higher prices, but why would the Governor want to make it illegal for business to give their costumers more information?

The reason is pretty simple, Governor Blagojevich realizes that in order for the Gross Receipts tax to have any chance to pass the State General Assembly he has to play up the populist rhetoric of it not being a tax on the general public but one on “greedy selfish” business that don’t want to pay their fair share to the state. No State Representive or State Senator in district that they have any chance of facing serious competition in, is going to want to vote for a 7 billion, if the public knows that they are going to paying for most of it. They don’t want that on record when they are up for re-election, nor does Governor Blagojevich, particularly if the rumors are true that he plans to run for a third term in 2010. That why you this is hidden in the bill and you don’t see any of the Governor’s supports wanting to talk about the effects of the Gross Receipts tax will have on the economy and why the only people a loud to talk before the State Senate are supports of the Governor’s bill. If the Governor really thinks that his programs will significant benefits for the state, then so be it, tell the public that, but also tell them that they will be paying the cost of most of the Gross Receipts tax and be up front about its negative effects on the State’s economy. Let the chips fall were they may.

Tuesday, April 17, 2007

Shooting and Taxes

The since yesterday the new has been rightly dominated by Virginia Tech massacre and right for so. I would hope that both politicians and media personality would let some time bases before they starting using this incident to push their agendas. Give the families time to grieve in private and give time for all of the information to get out to the public before we make any knee jerk reactions. One of the beauties of the colleges and universities in the United States are how open they are, it makes for easier free flow of communication and integration of the university and student body into the surrounding community. Massacres like these are incredible rare and the odds of any person being killed by one is very small, you the reader probably have a higher chance of being killed by a car slamming into your house, office or apartment while reading this. It would be a shame if we damage our communities by fencing off and putting metal detectors and visible armed guard around campuses.

Today is tax day and most everyone hated the income tax because in part it is a visible tax, everyone can see it and know exactly how much they are paying to the government. The Gross Receipts Tax on the other hand is an invisible tax because the cost of the tax become incorporated in the price of goods and services sold, so unless the public does some research they do not know how much paying to the government. That is probably one of the reason that the Governor wants a Gross Receipts Tax, because that way he can claim that he is not taxing the public and blame any price increases on greedy businesses. Wednesday April 18 there is going to be a lobbying day in Springfield against the Gross Receipts tax, I would encourage everyone to attend.

Wednesday, April 4, 2007

A Gross Receipts Tax is Progressive

The support of the Gross Receipts tax have argued that is most fair and progressive way to fund expanded State Government spending. Ignoring for the moment whether or not Illinois needs more government spending lets look at this claim. A tax is progressive when a person or business that has higher income either pays a higher percentage of their income under the tax or at least pays more money in raw terms. Under the income tax even with a flat rate people with higher incomes pay more in raw terms, if the rate is 3 percent some one that makes 20,000 dollars would pay 600 dollars in tax, some one that makes 50,000 dollar , 1,500 dollars in tax and some that makes $100,000 would have a tax bill of $3,000 for example. The Gross Receipt Tax is based off a companies revenues regardless of how much of profit they earn, in the business world profit is corporate income, so companies that have the same revenue stream but wildly different profit margins because of the industries they operate in would pay the same in taxes. The company with the lower profit margin would see a higher percentage of their income going to Government to pay taxes. For example the maximum rate for service industries is about 2 percent, so let say you have two companies, one a restaurant and the other business consultancy, both have revenues of 10 million dollars, but the restaurant makes a profit of 1.5 million dollars and the business consultancy makes one of 3.25 million dollars, both of these companies would pay 200,000 dollars, so the restaurant would be paying 13.34 percent of their income to the Government in the form of the tax, while the business consultancy would be paying only 6.15 of their income to the Government, so the effective tax rate as percentage of income would be much lower for the company with the higher profit margin. This is not progressive.

In reality a lot if not all of this tax will be passed on to the consumer in the form of higher prices for every good and service sold in the state. This will have a large impact on lower income consumers that spend all of their income on goods and service and have lesser effect on middle and upper-income consumers that save a percentage of their income. If the Gross Receipts tax raises the price of all goods and service in the state by one percent, which could well be an underestimate, so a low income consumer will see one percent more of their income going to the state in the form of an indirect tax, for example some one that earns $20,000 dollars a year would be paying 200 dollars more in indirect taxes to the state and their effective income would be decline by 1 percent. While on the other hand some one that earns 50,000 dollars a year but saves $10,000 a year would be paying additional 400 dollars because of the Gross Receipts tax a year, but would see their income reduced by only .8 percent because they saved a portion of their income. Some one that earn 200,000 dollars a year and saves 50,000 dollars would be paying 1500 dollars year, but would see their effective income reduced be only .75 percent a year. Since the richer people are the higher percentage of their income they save, the higher income groups will see their income reduced by less than lower income groups. This is regressive and exacts same as the sales tax, the only difference is the sale tax is visible to everyone when they buy something and the Gross Receipt tax will be hidden.

Monday, April 2, 2007

Local Effects of the Gross Recpits Tax

Sunday’s Peoria Journal Star had a nice article about the recovery of Keystone, for those of you that do not know Keystone is a steel maker in the Peoria and provides many good paying manual labor jobs to the area. A few years ago Keystone entered bankruptcy and say the price of their stock decline to 2 dollars share, since then the company has made a strong recovery with help from their employee’s union and a loan for Peoria country, the company’s revenues has grown, there stock price risen to 25.48 as of Friday March 30th and they have even entered into agreement to buy Calumetals, which is one of the remnants of the now defunct Calumet Steel. In a time when we hear a lot about decline manufacturing jobs and how American Steel companies are struggling to compete, Keystone is building themselves a nice little success story. One has to wonder how well Keystone’s story will continue if Governor Blagojevich get his way and Illinois enacts a Gross Receipts Tax, this tax would drive up their cost of doing business and make their products more expensive, which in turn would make Keystone less competitive compared to companies based in other states and countries.

Ultimately what all of this would mean would be that Keystone would become less profitable, which means that they would have less money to invest in expanded and that would be less attractive for investor to loan them money for new investment or buy their stock. The end result of less investment by Keystone means that they will be fewer new jobs created and the possibility of jobs cuts and if hurts Keystone ability to compete enough they might even end up in the same situation they were in a few years back.

A new poll done by the Public Opinion Strategies company found by a margin of 54 to 34 percent, voters believe that the Governor is breaking his campaign pledge not to raise taxes.