HealthBeat FYI: Illinois Tax Implosion

May 14, 2007

A funny thing happened on the road to Canadian-style health care in Illinois: Democratic Gov. Rod Blagojevich's tax increase to finance health care became the political rout of the year, says the Wall Street Journal.

The Democratic House in Springfield killed the proposed tax increase 107-0.

The "Blago tax" would have:

• Levied a $7.6 billion "gross receipts tax" on Illinois businesses.
• Forced most employers to offer health insurance or pay a 3 percent payroll tax.

As tax increases go, this was one of the worst, says the Journal:

• A "gross receipts tax" is popular with politicians because it applies to every dollar of company revenue, not merely on profits, or on final sales the way a retail sales tax does.
• But this means the tax tends to hit hardest those small and medium-sized businesses that have healthy sales volumes but narrow profit margins.
• The tax is a huge revenue-raiser but can also be a job killer.

Blagojevich tried to soften this impact by creating an exemption for business with annual revenues of less than $5 million.  But even with that exemption, retailers would feel the squeeze from the higher cost of goods.  And because the tax applies to all business transactions, it creates what economists call a "pyramiding" effect that has a damaging overall economic impact, says the Journal.

• The Tax Foundation estimated that Blagojevich's proposal would have been the largest state tax hike in the last decade, as a share of state general fund revenue -- at 27 percent nearly double the next closest, which was Nevada's 14 percent increase in 2004.
• In per capita terms, the tax hike would average about $550 per Illinois resident.

Source: Editorial, "Illinois Tax Implosion," Wall Street Journal, May 14, 2007.

For text:

http://online.wsj.com/article/SB117911179638401619.html (subscription required)

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