The economic harms of the Gross Receipts Tax (GRT) were well understood by the turn of the 20th century. Not only is the tax unfair, it is also inefficient and creates distortions. This is why most states abandoned TSOs in the early 1900s as states developed the ability to administer less harmful taxes. Unfortunately, some Massachusetts policymakers want to backtrack.
Today, only a few states charge a variation of the GRT. Those that still rely on it as a major source of income (such as Texas, Nevada, Ohio, and Washington) generally do so instead of one or more alternative taxes. None of these states impose corporate income taxes, and Ohio also repealed several other business taxes when it passed its GRT.
Some Massachusetts policymakers, however, want to layer a GRT on top of the state’s existing corporate income tax. If H.2855 becomes law, it would reduce the Bay State’s competitiveness and increase prices for consumers of already expensive goods and services. To make matters worse, Bay Staters would be asked to shoulder the additional tax burden at a time when inflation is already eroding purchasing power at a rate not seen in 1982.
The GRT has persisted into the 21st century thanks, in part, to its claim of a guaranteed revenue stream. But therein lies the iniquity. The so-called guaranteed revenue stream occurs because TSOs are rated independently of a company’s ability to pay, whether it lost money or made a profit in a given year. The result is an unfair tax that pushes struggling businesses further into the red and disproportionately hurts businesses with narrow profit margins.
Unlike other states that have adopted TSOs, the Massachusetts proposal seeks to apply a broad-based tax on services and goods at all stages of production while retaining every element of the current tax system. When Ohio passed its GRT, known as the Business Activity Tax (CAT), in 2005, policymakers did so while simultaneously repealing the corporate income tax, the registered capital and corporate tangible property tax. H.2855 takes a holistic approach and applies GRT to all receipts obtained from sales, services, real estate transactions, interest, rent, royalties, and various other charges, without repealing existing taxes. A 0.25% tax rate may seem low, but in the TSO world it is not: it is virtually identical to Ohio’s 0.26% rate, which replaces other business taxes. .
The TSO also lacks transparency, which violates a key element of sound fiscal policy. Although TSOs generally apply to all intermediate transactions during production, consumers are generally unaware that when they purchase a product at retail they pay a tax on the price of the good and at least one (may -be several other) iterations of the GRT. The GRT adds a windfall cost to production that is compounded as companies factor the tax into their selling price at each stage of production. The GRT is aggravated one last time when a sales tax is applied at the point of sale. This phenomenon, known as tax pyramiding, harms both producers and consumers because it artificially increases the final price of a good. In cases where there are few substitutes for a good or service, producers will pass on the full cost of the tax to consumers. And where there are substitutes, Massachusetts companies are at a disadvantage because their out-of-state counterparts won’t have the tax built into every layer of their production.
Massachusetts policymakers know the evils of the tax pyramid, which is why there are exemptions for many business inputs in the Commonwealth Sales Tax. The TSO would effectively revoke many of these exemptions.
TSOs are infamous for their tax pyramid effects, but H.2855 is particularly inefficient. The bill’s exemption threshold creates a disincentive to investment; its extensive bonding provision encourages emigration; and the added cost to the tax base threatens to raise prices for consumers in Massachusetts and elsewhere.
The proposed bill includes a $50 million receipt exemption that is apparently designed to target large corporations. However, the reality may not respect the intention. Unlike the CIT, which accrues the cost of goods, materials, labor, services, interest paid, and other annual losses, TSOs do not deduct the costs of doing business. In high-cost industries or those with low profit margins, even medium-sized companies in terms of net revenue could be subject to TSO liability.
Furthermore, the exemption threshold creates an obstacle to additional investments. Firms in low-margin industries would have little incentive to collect more than $50 million in revenue if additional investments incurred a tax liability that negates a significant return on investment.
Another source of inefficiency is attributable to H.2855’s extensive linking provisions. Under this proposal, the link is triggered, predictably, by a company that conducts the preponderance of its business operations in the Commonwealth. However, the connection can also be made by such a small economic activity as a single employee living in Massachusetts but working remotely for an out-of-state company. Below this nominal nexus threshold, H.2855 could tax the gross income of, for example, a Texas-based company whose sole business in the Commonwealth involves a human resources contractor working remotely from his kitchen table in Springfield.
Particularly broad nexus provisions encourage companies to prohibit employees from working remotely in jurisdictions where new tax liabilities could be incurred. The collective loss of remote worker revenue, sales and property tax revenue due to emigration or outright Commonwealth avoidance may well offset any new GRT revenue collected from businesses outside of the state. At a time when remote work is rapidly becoming the norm, Massachusetts policymakers should set conditions to attract new workers to the state, without risking pushing them away.
Since there are relatively few substitutes for many of the products subject to the proposed tax, the GRT on these products is likely to be fully passed on to consumers. But with the 12-month inflation rate at its highest level since 1982 and total health care spending expected to hit 19% of GDP by 2025, Bay Staters don’t need price increases. additional. Yet the new GRT could provide just that by increasing the cost of everything from automobiles to lab equipment.
The GRT will apply to Massachusetts companies that produce common vehicle inputs such as sunroofs, cup holders and laser welding machines. It will appear in the price of goods sold by professional sports teams, including tickets and souvenirs. Even as supply chain issues plague the country, the GRT will add to the cost of shipping companies importing or exporting goods through the Port of Boston.
Other likely candidates for the Massachusetts GRT include medical device producers, pharmaceutical companies and technology companies that are so prevalent in the Bay State. These companies produce medical devices such as pacemakers, stents, orthopedic insoles and blood pressure cuffs.
The unique function, high demand and relatively high barriers to market entry in the above-mentioned industries can result in companies accumulating high annual revenue. Less visible, however, are the equally high input costs needed for production: wages of highly skilled labor, research and development costs, costs of emerging technologies, and so on. With high operating costs, it doesn’t take long before a large portion of gross income is reduced to a small amount of net income. For young companies struggling with start-up debt in these sectors, mature companies recovering from an unprofitable year, or narrow-margin companies that end up bearing some of the tax, the GRT makes it even more difficult the return or maintenance of profitability.
There are still other reasons to doubt the promises of the GRT, particularly in Massachusetts. At the top of the list is the availability of substitutes. A producer or consumer can avoid the burden of a tax if they can find a suitable substitute that does not impose the same tax effects, but this is not always possible. In these cases, state substitution can be just as effective. Massachusetts is a geographically small state. Thus, it may be more profitable to produce or consume via a neighboring state. Consider Massachusetts’ largely ineffective ban on menthol cigarettes. Instead of giving up the habit, many Bay Staters simply purchase their tobacco across state lines. If the proposed GRT becomes law, businesses that can’t fully shift the tax to consumers could be persuaded to move their operations to one of Massachusetts’ more tax-competitive neighbors.
Given Massachusetts’ $5 billion surplus in fiscal year 2021 and its sustained revenue levels in fiscal year 2022, it is difficult to justify the economic risk to the Commonwealth of enactment. of a TSO. Not only is the tax unfair and inefficient, it could also be what pushes businesses and workers away to another state. Consumers who cannot move will end up bearing the burden of rising prices. GRT can be paid by corporations, but tax pyramiding ensures that individuals bear the burden whether they like it or not.