My accountant, Linda Forman, sent me this note on the Illinois Gross Receipts Tax proposed by Gov. Blagojevich. Now, I voted for the man twice, and I voted for my state senator (who also supports the proposal) twice, but if they go ahead with this proposal I'm not sure I will continue to support them:
The Gross Receipts Tax Proposal
There are thoughtful people in the political arena mulling over the proposal of a gross receipts tax and the prospect of health care coverage for the uninsured employees in Illinois.
While debate goes on, I would like you to visit with a company or two that could be a composite of many small business clients.
The Service Company
Currently, a service company employs 40 people and provides health care and life insurance, fringe benefits and a generous profit sharing plan.
It funds the fringe benefits and profit sharing with some of the $300,000 in profits it realizes on its $6,000,000 in service sales.
Oh, did I mention that the business owners would like some income each year from their capital investment in the company. That usually is a 9% return, or $90,000.
So the $300,000 in yearly profits is put to good use – excellent employee benefits and a reasonable rate of return on capital invested. This is a growing company. It pays taxes on its net income, pays various business taxes to the state and community and keeps 40 people on the tax rolls. It also uses the services of other Illinois businesses, contributing to a vital economy.
Under the gross receipts tax proposal, the $6,000,000 gross income will be taxed to the tune of $300,000. So there goes the profit that funded employee retirement plans and kept investors happy. BUT now, other businesses that provide service to this company have also raised their rates to cover the gross receipts tax, so this company is now operating at a LOSS. And it has lost its competitive pricing edge.
When companies operate at a loss, their usual options are:
- Lay off employees
- Cut benefits
- Move to a more business friendly area
And this helps Illinois’s economy HOW??
- More unemployment compensation payments.
- More uninsured workers? Loss of tax revenue from income taxes.
- Loss of a productive business if it moves out of state.
Raising “prices” may work for government, but in this global economy, it is often NOT an option.
The Widget Company
The Widget Company competes with other widget makers, striving to make a good quality product at a competitive price. It has made a commitment to stay in Illinois, even though the state has hiked fees in the past. The corporate income tax is 7.3% of net income, certainly a significant tax but bearable, since net profit is only 4% of gross receipts of $6,000,000; the tax is approximately $17,000.
The company’s margins on its product lines cover the administrative and sales overhead. If it had to raise prices 5% to cover the gross receipts tax, it would lose business in a market where customers are swayed by even the slightest rise in price.
If the company has to pay a gross receipts tax of 5%, it would have to pay $300,000!! But its net profit is only $240,000 so it would be $60,000 in the hole. This is a company that is going to MOVE out of Illinois to a warmer climate in a state where business is appreciated. What other choice does it have – it can’t pass along the costs to consumers while dealing in a global marketplace.
The gross receipts tax idea is just that - GROSS. It will repel new business and seriously impede current business growth. There has to be an analysis of WHY some large corporations are not paying tax, since the formula for paying Illinois taxes is based on a factor of Illinois sales to total sales. And there has to be a corollary analysis of what other taxes big business is paying to Illinois, since other fees on businesses have risen sharply in this administration.
I have clients who will be severely impacted by a gross income tax - and attempts to remain in Illinois and deal with the tax will only result in loss of jobs and benefits for their employees.
There has to be an intelligent game plan - and we need more information from the governor before we can assess where the issues are.
AND, with regards to an expanded Illinois health care plan, I think a good health plan needs to be national in scope and administered like Medicare - and that the state of Illinois, in its precarious financial position, can't take on health care while it has to correct huge pension and other funding deficits. And given the historically poor reimbursement payment rate and lateness of payment, where will Illinois find the health care providers to accept families covered by the proposed health insurance plan?
Linda Forman, CPA
By the way, no, Inner Drive Technology is not the service company she mentioned, as much as I might wish for $6 million in revenues.
Update, 8:49 am: Linda adds the following:
The gross receipts tax rate may have lowered in discussions since this was first written, but the concept is still there, along with the health insurance issue. Actually many companies are toying with the idea of dropping their coverage and only paying the state's 3% rate, which will cause a larger population to be in the state's insurance fund - another negative result of this proposal.