Will Nothing Get Done in Springfield this Summer

There are now rumors that nothing will get done in Springfield this summer as the Governor will refuse to sign any bills until he gets his proposed tax and spending increases. What this means is that all of the issues that are pressing the state, the under funded state pension that threatens to destroy the state finances in the long run, education reform, property taxes, needed improvements to the State’s capital infrastructure, ect, might not get addressed. If the rumors are true this means that Governor Blagojevich is willing to hold the future of the State of Illinois hostage unless the State Legislator gives into him on a massive tax increase that is oppose by not just Republican and Business groups, but by leading Democrats, including his own Lt. Governor, consumer and urban groups. The voters need to put pressure on Governor Blagojevich to drop his planned massive tax increase and work with the Democratic and Republican leaders in the State House to pass a budget that controls spending, cuts back on unneeded programs and pork, fixes the State Pension System and improves funding for capital project and other needed programs.

A Golden Opportunity for the Illinos Republican Part

The Gross Receipts Tax debate has handed the Republican Party a golden opportunity to turn around it fortunes in Illinois. More likely than not the Gross Receipts Tax is going to go down in flames, but the Illinois Republican Party needs to play it right. First of all they need to come up with alternative proposal to fix the State’s financial woes that focus on spending controls and smart pro-economic growth polices. Along with that they need to present policies to reform the State education systems, even thou there is little chance of anything that is put foreword by the Illinois GOP passing, it will help to show that they can lead were Governor Blagojevich and Illinois State Senate President Emilio Jones can not.

Next they work hard with Democrats that oppose the Gross Receipts Tax and make sure everyone knows that it is a bi-partisan effort and that when the Illinois Republican Party come back to power they can and will be willing to working with the other side. Secondly as much as we focus on the negative effects that the Governor’s Tax increases will have on businesses, we need to also focus on the negative effects on the consumers. One of the main points that needs to be made is that it will raise the cost of everything people buy and that because the poor spend most of, if not all of, their income on goods and services they will see the percentage of their income that goes to taxes raised by the most. That slower economic growth means fewer new and better paying jobs in the states, which makes it harder for the poor to work their way out of poverty. It needs to made a matter of businesses, consumers and the poor and how it will hurt them all.

More Oppotion to the Governor's Tax Hike and the Payroll Tax

There is more opposition coming out against the Governor’s tax increase, with Lt. Governor Pat Quinn, Comptroller Dan Hynes and State Treasurer Alexi Giannoulias have all come out against the tax increase, what makes this interesting is that they are all Democrats and that the Democratic Majority leader of the Illinois State House of Representatives has also made negative comments about the Governor’s plan. So it seems that Governor Blagojevich can not even get the leaders of his own party to sign on to his tax hike.

The other part of the Governor’s tax increase that has been largely ignored by the attention that Gross Receipts Tax has gotten is his call for a 3% payroll tax. A payroll tax is a tax that is placed on companies based on the number of employees they have and how much they pay those employees. So under the Governor’s tax, a company would have to pay 3% of the salaries of each employee they have to the State Government. This tax like the Gross Receipts tax would be bad for the states economy as a whole and bad for workers. The payroll tax comes an extra cost that is add to business when they higher more employees, so the cost of an employee that has a salary of 60,000 dollars a year would be $61800 a year, the cost of the salary plus the tax, assuming everything else is held constant. In reality part of the tax will end up being paid by the companies employees throe lower salaries, for example that 60,000 dollar a year employee might end up being paid only $59100 a year if half the cost of the tax is passed on to the employees. By raising the cost of hiring workers, this tax would lead to fewer new jobs being produced in the state of Illinois each year as labor would become more expensive. For example if a company has a hundred employees with the average salary of 40,000 dollar a years and assuming they pay half the cost of the tax, or 1.5, that company would end up paying 60,000 dollars a year in payroll taxes, or more than the price of one more employee. A company with the same features but with a 1000 employees would pay $600,000, or enough money to pay 15 new employees.

The True cost of the Governor's Tax Increase

Today the Tax Payers Foundation released an estimate that the Governor’s Gross Receipt tax and payroll tax would eat up 1.3 percent of the states economy or over 7 billion dollars, this is actually an underestimate of the taxes true cost. To estimate the true cost of the tax you have to take into account its deadweight effect, deadweight loss is something that a lot of non-economist have a hard time understanding. Deadweight loss is the loss in economic activity, benefit, which is caused by something that restricts the market place, be it a tax, trade barriers, monopolies, ect. The way that a tax causes a deadweight loss is that when the government takes money out of the economy in the form the tax, there is a loss of economic activity in two ways, first part of it loss to overheard and the other part is loss from a direct decrease in economic activity. When the government takes money out of the economy consumers and businesses have less money with which to purchase goods and services and to save. If people and business are buying less that means other business will see their revenues decrease, which means that those companies will have less money to invest in expanded production capacity and will higher fewer new employees. If people and businesses have less money to save that will else cut down on investment and economic growth. Most economic estimates put the deadweight loss as between 60%-100% of the total value of the tax, so the real cost to the State of Illinois economy from the Gross Receipts and Payroll tax is not 7 billion dollars but 11.26-14 billion dollars a year or 2.08%-2.6.2% of the state of Illinois Gross State Product. In the long run this cost compounds, for example Illinois GSP is about 538 billion and assuming a 3% year rate of growth the state economy would be 554 in 2008, 570 in 2009, 587 in 2010 and 605 in 2011 with out the Governor’s tax increase, with it the state GSP would be, using the low end estimate for the loss to the state economy, 542 in 2008, 547 in 2009, 552 in 2010 and 557 in 2011. So over 4 years the Governor’s tax increase would take about 48 billion dollars out of the Illinois economy. While this is a simplistic estimate it does a good of showing the effect that this could have on our state.

The Gross Receipts Tax is Bad for Long Term Economci Growth in Illinois

I already talked about how a Gross Receipts Tax would hurt the consumer, business and the economic climate in the state of Illinois, now I will mention another way that it will hurt longer term economic growth in the state. The Gross Receipts tax will lower business profits by raising the cost of doing business in the state even thou the majority of the cost of the tax will be passed on to the consumer, it will still hurt business’s profits throe two thing, one the direct way, they will ended up paying a portion of the tax themselves, and the second way indirect way, higher prices mean consumers will be able to buy fewer goods which will lower revenues and profits. If business’s in the state are earning lower profits they will have less retained earning to invest in capital goods and expanded production in the state. Investment in capital goods and expanded production facilities means that business will higher more labor and produce more and less expensive goods, which raise everyone standard of living, makes us all richer and increases the State’s rate of economic growth. Less investment means that’s the states economy will grow slower and that their will be fewer new jobs. Indirectly the Gross Receipts Tax will hurt investment because it will discourage companies that are not based or do not currently directly do business in Illinois from investing in the state. The reason is that companies base investment decision based off what the expected rate of return on their investment would be in that state compares to what would be earned in other location and the Gross Receipts Tax would reduce what companies would be able to earn on their investments in Illinois and make over place more competitive when it comes to attracting business investment. Which is another reason that the Gross Receipts Tax is just plan bad.

More Problems with the Governor Budget

Governor Blagojevich’s budget proposal contains massive increases in spending in almost every area, many of them not need, expect for one, improvement of the states capital infrastructure. This is one area that the State legimately needs to spend more money on. Building and maintaining a solid transportation infrastructure is one of the most important things the state can do in order to promote a healthy economy and attract businesses to the state, the problems with and condition of the states highway, roads and other infrastructure has been responsible for a car company choosing not to locate a new plan in Illinois. A good transportation infrastructure makes it easier, cheaper and quicker for companies to bring in supplies and ship out their products and this makes sites with access to good transportation infrastructure more competitive when it comes to attracting business. It also helps the economy by making it easier for the general public to travel in order to commute to work or shop. Instead of increasing spending on all these unnecessary programs, the state’s new budget should cut back on spending on unnecessary programs and projects, full fund the pension system while shifting new employees from a defined benefits plan to a defined contribution plan, move the states Medicaid programs to a manage system and then use those saving to increase spending on capital improvement projects and education.

Today Bruce Braker the President of the Tooling and Manufacturing Association release a good little chart that shows how the Gross Receipts Tax would be pyramid and the amount of tax that is paid on each good would be far high than the statutory rate.

“Here is an example of pyramiding in the manufacturing process, assuming the Legislature enacts the 0.5 percent tax suggested by Blagojevich:

“Basic industry” sells $200 worth of raw materials to a “parts fabricator”: $1 tax.

“Parts fabricator” adds value and sells $400 product to “manufacturer”: $2 tax.

“Manufacturer” adds value and sells $800 product to an “integrator”: $4 tax.

“Integrator” adds value and sells $1000 product to a “wholesaler”: $5 tax.

“Wholesaler” adds value and sells $1,200 product to a “retailer”: $6 tax.

“Retailer” adds value and sells $1,600 product to “consumer”: $8 tax.

In this example, $26 in taxes was paid on a single product that was sold to the final consumer for $1,600. Thus, the effective tax rate was 1.7 percent, or more than 300 percent higher than the rate suggested by the governor.”

What this chart leaves out is that most of this tax will ended up embedded in the final price of the good and paid for by the consumer. While 1.7 percent might seem small, remember this will be placed on every good and service that is produced in the state and the consumer will see the price of everything they buy rise.

Another Voice against the Gross Recepits Tax

There is more opposition to the Gross Receipts Tax coming out, today The Chicago Urban League President Cheryle Jackson said that while she agrees with what the Governor is trying to do, she oppose his tax increases. To quote her: “What this legislation does is penalizes the very thing that is the answer to economic development and job creation in the Black community,” Jackson continued. “It penalizes and discourages the very thing that is going to increase more jobs and increase more development in the Black community.” She is exactly right, economic growth is the engine that will improve black communities in the State, poor communities and every other community. Economic growth means new and better jobs for unemployed and those in low income jobs; it means more money for everyone, better education oppurnties and development. Economic growth is the thing that can help to alleviate or end poverty. The Gross Receipts Tax would hurt economic growth in the state, which means fewer new business in the state, fewer new jobs and possibly companies leaving the state and cutting back on the number of employees that they have. This means that you will have fewer people being able to work their way out of poverty and more people that will have to rely on government programs and aid. Hopefully more community leaders will be able to see the negative effects of the Governors tax grab and will oppose it. The best way to defeat this tax is for there to be a coalition made up of both business and community, right and left, that oppose the Gross Receipts Taxes and it negative effects.

why the gross receipts tax is bad for the consumer

The Gross receipts tax is now official part of the Governor proposed new budget, as anyone that reads either of my blogs already knows this tax is bad for the economic climate of Illinois and will hurt the state’s economy growth, encourage companies to leave the state, make it hard to retain companies that are based here and hurt job growth. This tax will also directly hurt the consumer. First when Governor Blagojevich says this is about making business pay their fair share, it’s a lie, business in Illinois already pay 50.8% of all taxes and fees paid to state and local governments in Illinois, compared to the nation wide average of 42.6%. So business in the state are already paying there share of taxes.

Secondly it’s the people that are going to end up baring the burden of most of the tax are you and me and every other consumer in the state, rich, poor or middle class. The reason for this is that most of the cost of the tax will be passed on to the consumer in the form of higher prices. The reason for this is that since a Gross Receipts tax is based on the amount of revenues that a company brings in not its profit margin, which is revenue minus cost; this tax will increase of the cost of doing business in this state for every company in Illinois in two ways. First this will raise their total cost, for those of you that have economics 101 it will raise all of there cost curves, and companies to keep there profits at near the same levels as before the tax will have to raise their prices. Some of the Governor’s followers and hangers on have argued that competition and the market will keep companies from passing on to much of the tax increase to the consumers, but they are misunderstanding how the free market works. What the free market does is prevent companies for charging unfair prices for a good and/or service, because if they people will see the higher than excepted profit for that market and new companies will enter the market and force the price back down. Since the Gross Receipt Tax will affect most if not all businesses in the state, they all will face the newer higher cost curve and will not be able to lower the price of their goods and/or services with out cutting into there profit margin, which would make no-sense for a company to do.

This is the first way that the Gross Receipts Tax will raise prices for consumers, the second way that it will raise prices is that goods and service sold between business will be indirectly taxed at there full value not the value added by a company, so if company A sells a good to company B for 6 dollars, it will be taxed on that whole 6 dollars, then if company B uses the good it bought from company A to make a product that it sells to the consumer for 10 dollars it will be taxed on the whole 10 dollars so the six dollars worth of value in that product will taxed twice in this case. You could very easily have cases were the value of product could be taxed 3 or 4 times before it is sold to the consumer. While this may be a little confusing, the end results if pretty simple and clear, because the goods and service will be taxed this way the cost of raw materials and business service for companies in Illinois will go up, which means that their total cost will increase yet again and prices will rise more to make up for the increase in cost.

This tax will raise prices in two ways, one throe increasing the cost of doing business in Illinois by raising the taxes that a company has to pay and secondly by increase in the cost of raw material and business services in the state. In the end large portions of the tax will ended up being paid for the consumer and ask yourself why Governor Blagojevich isn’t beings honest with the public about the effects of the Gross Receipts Tax? I am guessing because he realize that if he told the public that it would raise the price of almost every good and service in the state, he realize that very few people would support it. So instated he is playing the populist card and trying to pass this off as greedy businesses not wanting to pay their fair share of taxes.