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IMA Tax Policy Blog

A History of Gross Receipts Taxes in the U.S.

By Colby Pastre, The Tax Foundation — Why Four States Repealed their GRTs, and What Lessons We Can Learn from Their Mistakes . . .

Despite broad agreement that gross receipts taxes cause economic problems, some states still consider them a serious policy option. Most recently, Oregon has proposed one of the largest statewide gross receipts taxes in U.S. history. According to a new study from the nonpartisan Tax Foundation, Oregon could take a lesson from states that have experimented with gross receipts taxes and found that they reduced levels of transparency, competitiveness, neutrality, and fairness.

The Tax Foundation’s new report compares the details of gross receipts taxes in four states—Indiana, New Jersey, Kentucky, and Michigan—and discusses why those states recently decided to repeal them. The report also documents the firsthand experiences of legislators, lawyers, economists, and business groups, showing how gross receipts taxes harmed their state’s economy.

“Each time gross receipts taxes are enacted,” said Tax Foundation economist Nicole Kaeding, “they create economic problems that cripple growth, conceal true tax burdens, and breed inefficiency. The lessons we’ve learned from these four states echo what has long been acknowledged by lawmakers, scholars, and economists—gross receipts taxes are not fit for the modern economy. They should take their place in history books, not in state tax policy.”

The report finds that:

States have in some cases enacted gross receipts taxes as an immediate source of increased revenue, neglecting the well-known established economic consequences of gross receipts taxation.

Four states—Indiana, New Jersey, Kentucky, and Michigan—each enacted gross receipts taxes, but repealed them after experiencing negative effects. New Jersey’s and Kentucky’s taxes lasted only several years.

Enactment quickly results in economic problems, including reduced levels of transparency, competitiveness, neutrality, and fairness.

Despite broad agreement that gross receipts taxes lead to many economic problems, some states have newly begun to consider them as a policy option.

States exploring tax reform should follow the example of other states and exclude the gross receipts tax from their revenue toolkit.

Full Report: Gross Receipts Taxes: Lessons from Previous State Experiences

Source: The Tax Foundation, the nation’s leading independent tax policy research organization.