Tax Foundation warns of the harm of a new business tax, praises NPRI study

Write on Nevada ^ | 7/13/2010 | Victor Joecks

[NevadaPolicyResearchInstitute]

The Tax Foundation just released a new fiscal fact sheet on the tax situation in Nevada.

It not only confirms the recommendations of the Nevada Policy Research Institute's "One Sound State, Once Again" study, it destroys the case liberals try to make for a corporate income tax or gross-receipts tax.

[A] corporate income tax is not a good choice if revenue stability is the goal. As the table below shows, corporate income taxes have proven to be the most volatile of the major taxes, as measured by year-over-year revenue changes. …

This showing of extremely volatile corporate income tax receipts nationwide is consistent with the Nevada Policy Research Institute's calculations for Nevada, and it is consistent with other scholarly work on the topic. Such volatility can be problematic for state budgets, where predictability and year-over-year revenue smoothness is preferred to maintain annual spending commitments. This is especially troubling for a state that has a bi-annual budgeting procedure. …

An important study released last year by the Organization for Economic Growth and Development (OECD) found that of the various taxes a country can impose, "Corporate taxes are the most harmful tax for economic growth."[3] The administrative and compliance costs of corporate income taxes are also considerable, and scholars across the political spectrum have called for the abolition of state corporate income taxes. ...

The chief economic problem with gross receipts taxes is the pyramiding nature of the tax. [5]That is, since the tax applies each time a business sells its goods or services, the tax "pyramids" on products as they move through the production process. The longer the production chain, the higher the effective tax rate on the final product. This produces major distortions in economic decision-making, with notably negative impacts on low-margin, high-volume businesses. …

Thus, a gross receipts tax badly distorts and interferes with business investment decisions, leading to lower economic growth and job growth. Sales, income and property taxes do not have the same tax pyramiding feature, making them more economically efficient taxes. An increase in any of those taxes would cause far less economic harm than a gross receipts tax that raises the same amount of revenue.

Read the whole thing.

So what does the Tax Foundation think of NPRI's proposal to broaden and lower the sales tax rate?

Nevertheless, sales tax broadening can eliminate many unjustified exemptions, and if done without favoritism for particular industries and in a way that reduces the overall sales tax rate, can improve the stability of the sales tax while generating new revenue or paying for tax reductions elsewhere.

The Tax Foundation does warn of the dangers of businesses trying to carve out exemptions for their specific industries, and while this would be a problem, it's a problem that you face in any tax system. Taxes should be uniform and low, and believers in the free market are always going to have to defend that principle against liberals and businesses who want a special advantage.

With the legislature's tax study AWOL (Ed Vogel of the RJ mentions this today as well), NPRI's tax and fiscal study is the only recent tax study available for public debate and discussion.

Also: Read NPRI's press release on the study.