Illinois Governor Rod Blagojevich recently introduced a plan to reform the entire basis and foundation for tax collection in his State. Central to this plan is the introduction of a gross receipts business tax which would impose taxes on all business over $1 million in revenue based on gross receipts rather than income. Services companies would pay 1.8% of gross receipts while manufacturers would pay .5%.
In addition, companies which do not provide healthcare for their employees would be subject to a new payroll tax. In other words, Blagojevich’s plan will not just reform the process of tax collection in his state. Rather, his stealth goal is to raise an additional $7 billion in funding to fund healthcare and education in a giant wealth redistribution plan that will take away from, in his words, “corporate fat cats” who are draining society.
But even if you believe in increased funding for education and healthcare and the notion that cigar-smoking corporate “fat cats” are hurting the State, there are significant flaws in this approach. The most nefarious aspect of the plan is that Blagojevich is introducing it despite his campaign promise not to raise the “personal income tax”. This logic, however, is faulty, as the costs of living will rise, in the state commensurate with the impact on the cost to do business within it. In other words, a new personal income tax will be baked into the cost of living in the state. Let’s examine how.
Ultimately, a business-based VAT (Valued Added Tax) levied at each stage in the supply chain) raise prices for all consumers—especially those on the low-end of the income spectrum. What Blagojevich is hiding from view is that for manufactured goods, there are layers upon layers of gross receipts taxes which will need to be collected from different suppliers—adding cost at every step in the supply chain. This will impact all consumers—including the poorest residents of the State—in die form of an increased price for end products, ultimately leading to regionalized inflation.
But the dangers of this plan do not just occur on the micro-economic level. Let’s consider a macro-perspective for a minute. Two of Illinois’ leading exporters are Boeing and Caterpillar. The 5% increase along the supply chain could add a material sum to the finished cost of a manufactured product (such as a diesel generator), making Illinois exports less attractive. The tax would also serve to make Illinois-based manufacturing services companies such as logistics providers less competitive―who would be forced to pass the costs onto customers, in addition to the fuel surcharges which they already levy. The net impact ultimately will be a loss of manufacturing and services related jobs in Illinois, as companies are forced to move their operations out of state to stay competitive.
Fortunately, it’s not just Republicans who are trying to defeat this measure. The Democratic Mayor of Chicago, Richard Daley, was quoted in the Chicago Sun Times as saying, “To describe every major CEO in Illinois as fat cats is a mistake … They don’t have to be here. They can go to Wisconsin. They can go Indiana. They can go to India. They can go to China. So, if you want to beat up businesses, go beat ̀em up and when they leave, just wave to ̀em and they’re going to wave back to you.”
At a visceral level, Mayor Daley understands the impact that such a tax plan would have on his city and his state. He knows that it would raise the cost of living, increase unemployment, and drive some of the largest companies across the border to neighboring locales, reducing the state’s overall competitiveness. For the future of Illinois-based manufacturing, let’s hope that other Democratic lawmakers in Illinois come to their senses and join the Republican-led opposition to Blagojevich’s dangerous plan.