Towards Fairness: Rethinking Gross Receipts Taxes

Image courtesy of the Tax Foundation

May 21, 2024
Balaji Manohar, CEO, Madras Accountancy

My perspective on taxation is shaped by a commitment to both economic efficiency and fairness. The recent article by Joseph Johns, titled "Gross Receipts Taxes by State, 2024," presents a compelling argument against Gross Receipts Taxes (GRTs) that strongly resonates with me. The inherent inefficiencies and economic distortions caused by GRTs require a reevaluation of their use in today's business environment.

Imagine a dairy farm that produces milk, which then goes through various stages: packaging, distribution, and finally, sale at a grocery store before reaching the consumer. At each stage of this supply chain—from the farm to the packager, then to the distributor, and finally to the grocery store—GRTs could be applied to the total revenue made at each step without allowing deductions for expenses incurred at previous stages.

This leads to tax pyramiding where the same product is effectively taxed multiple times before it even reaches the consumer. For instance, the farm sells the milk to a packaging company, which then sells it to a distributor, each time incurring a tax on the gross amount they receive, even though much of that amount is needed to cover the cost of production, packaging, and transportation.

The cumulative effect of this taxation increases the cost at each transfer point, which leads to higher prices for consumers at the grocery store. Moreover, GRTs result in a disproportionate impact across different business models, hitting low-margin economy-critical businesses the hardest simply because they turn over a significant amount of money but keep very little of it as profit. As a result, they end up facing a higher relative tax burden, which can stifle growth and innovation for everyone.

Johns points out the historical context and modern criticisms of GRTs, emphasizing that they are a relic of past economic conditions that no longer serve our current economic or business climate. It is time for states that still employ GRTs to consider transitioning towards more equitable forms of taxation that reflect the economic realities of businesses today.

A more balanced approach would be a low-rate, broad-based corporate income tax that allows deductions for business expenses. This system would not only align tax liabilities more closely with profitability but also promote fairness by taxing businesses based on their actual economic activity rather than mere revenue. Such an approach enhances transparency and rationality in our tax system—qualities that are indispensable for effective fiscal policy.

We advocate for tax reform that fosters a fair business environment and supports sustainable economic growth. We encourage policymakers to phase out GRTs and consider tax systems that incentivize rather than hinder business innovation and efficiency.

Let's prioritize reforms that will build a tax environment conducive to the thriving business landscape that our economy relies on. It is not only about enhancing revenue but also about upholding the principles of fairness and economic equity.