What makes the Ohio CAT an attractive version of the GRT is that it replaced more unpopular taxes and has a broad-base, low-rate structure. Several states originally based their GRT proposals on Ohio’s CAT. Additionally, the GRT’s misleadingly low statutory tax rates are more acceptable at first glance, despite the hidden pyramiding effects that lead to higher effective tax rates (ETRs), as discussed in the next section. The GRT also seems easier to understand and explain than other taxes. In some ways, states may find it easier to tax services by enacting a GRT than by expanding the existing sales or income tax base. They also need to reform their states’ outdated tax systems to match current economic realities. Similar objectives drove the 2017 wave of GRT proposals-all four states have budget deficits, and additional revenue is crucial. 5 In the first decade of this century, states considered GRTs to generate revenue, enhance business competitiveness, or implement alternatives to the administratively burdensome state corporate income tax (CIT). Several states went through similar exercises in the early 2000s New Jersey, Michigan, and Kentucky even passed state laws adopting a GRT, but they were later repealed. The recent proliferation of GRT proposals is not new. 4 None of the current state GRTs fit squarely into this description-they either exclude certain types of sales or entities, tax different businesses at different rates, or allow various deductions. Business entities simply apply a single tax rate to the sales receipts to calculate the taxes owed. A GRT does not provide allowances for costs incurred by sellers or offer exemptions to particular types of sales. In its most general form, the base of the GRT comprises the receipts from all sales of goods and services, and applies to all businesses within a state. Typically, states impose a GRT as a privilege of doing business in the state.
New Mexico has a GRT, but its characteristics are more similar to a broad-based sales tax. Besides Delaware, these states do not explicitly refer to the tax as a GRT-Ohio refers to the GRT as the commercial activity tax (CAT), Texas calls the state GRT a franchise tax or margin tax, Washington named its GRT as the business and occupation (B&O) tax, and Nevada’s GRT is the commerce tax. How can we explain that four states that do not have the GRT are seeking to enact it, while Texas is trying to repeal the GRT? What led to these seemingly conflicting trends? What Is a GRT and What Has Caused the Recent Surge of State GRT Proposals?įive states (Ohio, Texas, Delaware, Washington, and Nevada) currently have a statewide GRT. The unpopularity of the tax is widespread, leading policymakers to propose repealing it however, such efforts were unsuccessful in the 2017 legislative session.
For example, the Texas Supreme Court in September heard oral arguments for a case in which the petitioner claimed that the 10-year-old franchise tax is actually an income tax. In Texas, the franchise tax, a hybrid form of the GRT, has been the subject of several lawsuits. Although none of the proposals was implemented, Oregon has indicated that it might propose creating a GRT again in the next legislative session, 1 and West Virginia’s proposal was approved by the legislature but ultimately not enacted. However, in 2017, four states-Oregon, Oklahoma, Louisiana, and West Virginia-sought to enact a statewide GRT. Ask any economist about the gross receipts tax (GRT) and you are likely to get a frown of disapproval.
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