Commerce tax: A Great Depression throwback
One of the problems with “progressive” ideas is that they often turn out to be the recycled remains of already tried-and-failed concepts.
Nevada’s Commerce Tax — set to take effect this summer — is a prime example.
Billed as an innovative tax on large businesses, the Commerce Tax will soon slap a new cost of doing business on any company with more than $4 million in revenue. With 26 different tax rates — depending on the industry — the tax will usher in a flood of new revenue to government coffers.
In actuality, the core concept of the Commerce Tax is little more than a relic from the Great Depression, dressed up with new complexities for a more diverse economic landscape.
West Virginia enacted America’s first gross receipts tax in 1921 as an unimportant revenue source for the state. It wasn’t expected to vastly alter the state’s revenue projections, and was primarily designed as a way to diversify revenue sources during a time of significant economic expansion.
Soon, however, the Great Depression hit.
Other state and local governments — just like the struggling taxpayers who were hit with depressed wages and unemployment — were panicked for new sources of revenue. Gross receipt taxes, because of their indifference to a company’s profitability, exploded in popularity.
In 1933, the state of Washington frantically implemented a broad based gross receipts tax, describing the move as a “temporary, emergency revenue measure during the depression.” Of course, as Nevadans well know, “temporary” taxes are rarely as short-lived as advertised. Washington, as it turns out, still has their depression-era tax relic inflicting harm on their economy.
Many other states also jumped on the Depression-era bandwagon of the new taxation scheme. In just a year, 15 states had followed Washington’s example — leading policy experts to call for even more punitive and broad versions of the tax.
The reason for its popularity in the days of the Depression was pretty obvious. Even companies that failed to turn a profit were forced to pay most of these taxes, and unlike sales taxes or corporate income taxes, they often led to tax pyramiding — a phenomenon where goods produced in a single state are subjected to multiple taxes, resulting in much higher effective tax rates than advertised.
Of course, these “benefits” for state coffers came at the expense of job creators that were already struggling to stay afloat. Paying taxes on gross receipts despite seeing reduced profit margins and regularly negative cash flow — was an unbearable burden on many struggling employers.
Many companies turned to out-of-state producers for their goods to avoid tax pyramiding, and many others simply closed up shop. At a time in American history when laborers were desperate for work, outsourcing and closing down blue-collar jobs did nothing to shorten the duration of the Great Depression.
For this reason, many of these tax schemes were short lived. By the onset of the Second World War, many gross receipt taxes had been repealed or struck down in state courts. By the 1950s the tax had largely been discredited as burdensome and ineffective. By the 1960s it was widely accepted as a policy failure and a notorious job killer.
In the second half of the 20th century, virtually no similar broad-based taxes were proposed, and by 2002, only the state of Washington stubbornly clung to their progressive-era gross receipts tax.
Unfortunately, bad ideas have a way of resurfacing.
In recent years, policymakers have started reviving the already tried-and-failed concept of gross receipt taxes. Some of these new iterations of the tax are broader than others, but they all had their roots in the same tax structure that had failed magnificently to produce substantial revenue in the “old days.”
Given the performance of these taxes in the 20th century — including flaws that lead to a mass repeal of such taxes — Nevada’s Commerce Tax is poised to do great harm to emerging industries, growing companies and the future job prospects of Nevada’s workforce.
Gross Receipt taxes were a staple of desperate and ineffective Great Depression public policy. We shouldn’t import that era’s mistakes to the 21st Century.
Michael Schaus is communications director of the Nevada Policy Research Institute, a nonpartisan, free-market think tank. For more visit http://npri.org. This article first appeared in Nevada Business.