The Economics of Gross Receipts Taxes: A Case Study of Ohio
Excerpt from Adam J. Hoffer and Todd Nesbit, eds., For Your Own Good: Taxes, Paternalism, and Fiscal Discrimination in the Twenty-First Century. Arlington, VA: Mercatus Center at George Mason University, 2018
14 Pages Posted: 4 May 2018
Date Written: January 3, 2018
Gross receipts taxes are essentially a type of sales tax, but they’re levied at each stage of a good’s production rather than just at the final sale to consumers. Eight states — Alabama, Delaware, Florida, New Mexico, Ohio, Pennsylvania, Texas, and Washington — use gross receipts taxes. Ohio’s constitution prohibits sales taxes on food, and this chapter recounts how in 2006, the Ohio Grocers Association sued the state for its gross receipts tax, arguing that the tax is indistinguishable from a sales tax. The Ohio Supreme Court ruled that the gross receipts tax is a tax on “the privilege of doing business” rather than a transactions tax, upholding the policy. Key takeaways: (1) Compared to a simple sales tax, a gross receipts tax will result in a larger tax burden on goods that require more stages of production. Gross receipts taxes give businesses an incentive to minimize transactions between firms. (2) When taxes apply to firms’ gross receipts rather than their profit, the taxes are a larger burden for firms with low profit margins (like grocers) than is a sales tax.
Keywords: taxation, Ohio, tax policy, sales tax
JEL Classification: H2, H7, H71
Suggested Citation: Suggested Citation