Don't Fund California Single-Payer Health Care With a Gross Receipts Tax

The sales tax' big brother tends to cripple growth, lower wages, and promote inequality, economists warn. Will that stop California from doing it?


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California's single-payer health care proposal would eliminate premiums, deductibles, and co-pays for residents of the state, but would require massive tax increases—including the creation of a new, more complex version of a sales tax that would drive up the cost of living or doing business there.

There's still no fully formed plan to finance the California single-payer proposal, which cleared the state Senate with a 23-14 vote on Thursday and is headed to the state House. Implementing the so-called Healthy California Act, or HCA, would likely cost the state as much as $400 billion annually (that's more than California currently spends on its entire state government), and would require at least $200 billion in new revenue, if not more.

The bill is silent about how the plan would be funded, but an analysis published last month by the state Senate Appropriations Committee envisioned a 15 percent payroll tax increase to generate the necessary revenue. A new analysis released last week by researchers at the University of Massachusetts-Amherst, suggests that California pay for the single-payer health care plan with a new gross receipts tax of 2.3 percent, along with a 2.3 percent increase the state's sales tax (currently 7.25 percent), "along with exemptions and tax credits for small business owners and low-income families to promote tax-burden equity."

Those two tax hikes would generate an estimated $106 billion annually—far short of the $330 billion price tag attached to the HCA by the Amherst economists, so other tax hikes would also be required.

Still, the idea of funding a single-payer health care system with a new gross receipts tax should be a point against the creation of such a system, not one in its favor—no matter how much revenue the tax might produce.

Unlike regular sales taxes, which are imposed only at the final point of sale when a consumer purchases a product from a retailer, gross receipts taxes are applied at each and every transaction along a supply chain. In practical terms, you pay a sales tax when you purchase a widget from a store, and that's the only tax paid on the sale of that widget. Under a gross receipts tax, the widget-maker would pay 2.3 percent on the cost of the raw materials used to make those widgets, then the distributor would pay 2.3 percent when it buys widgets from the manufacturer, the retailer would pay 2.3 percent when it buys from a distributor, and so on. The taxes get rolled into the cost at each additional level and the consumer who makes the final purchase ends up paying for them all.

"Gross receipts taxes lead to higher consumer prices, lower wages, and fewer job opportunities, as the tax pyramids throughout the production cycle," explains Nicole Kaeding, an economist with the Tax Foundation's Center for State Tax Policy, a Washington D.C. tax policy think tank.

A gross receipts tax is particularly problematic for businesses that operate with high volumes and low margins—think fast food joints or any other company that relies on selling lots of cheap goods—because of how the taxes can cascade quickly and make profits impossible. They also distort the economy by favoring businesses that have in-house supply chains versus those that have to buy raw materials or products from someone else, because only the latter of the two businesses in that example would be hit with the tax.

Gross receipts tax proposals get tossed around periodically because governments are enticed by the promise of large, relatively stable (at least, more stable than income tax revenue, which can rise and fall with markets) amounts of revenue. But the trade-offs are not worth the benefits, Kaeding says, because "gross receipts taxes create economic problems that cripple growth, conceal true tax burdens, and breed inefficiency." That's why only five states—Delaware, Nevada, Texas, Ohio, and Washington—have a statewide gross receipts tax. Four other states—Indiana, Kentucky, Michigan, and New Jersey—recently abolished their gross receipts tax in an effort to improve economic conditions.

To be fair, there is an argument to be made that consumption taxes like sales taxes (even in the form of a gross receipts tax) are a more efficient and fair way of generating revenue than taxes based on income or property. That's a different debate, though, than the one happening now in Sacramento, where policymakers are not looking to offset one tax with another, but trying to increase taxes across the board to pay for a huge increase in government spending.

In a state that is already one of the highest taxed in the nation, there's good reason for officials to be hesitant about the creation of new, complicated taxes on California businesses and consumers. Gov. Jerry Brown, a Democrat, has so far mostly dismissed the idea of a single-payer health care system for California, telling reporters last month that the HCA was akin to trying to solve one problem by creating "even a bigger problem, which makes no sense."

Residents of the state seem to feel that way too. According to polling from the Pew Research Center, less than 30 percent of all Americans (and only 40 percent of self-identified Democrats) favor having government as the sole provider of health care. In California, a new poll from the nonpartisan Public Policy Institute of California found support for single-payer state healthcare at 65 percent, but with that number dropping to 42 percent when respondents were told at least $50 billion in new taxes would be required to pay for it—and that's an optimistic view of how much revenue would be needed.

For now, there is little evidence to suggest that states like California will actually implement single-payer health care plans. The development of these proposals seem to represent, as The New York Times put it this weekend, "the sweeping ambitions of a frustrated party, rather than to map a clear way forward on policy." In other places where single-payer proposals have been tried or suggested—including Vermont and Colorado, where proposals sank in recent years, and in New York, where a single-payer proposal cleared the lower legislative chamber last month—the price tags have been exorbitant and state officials have been unwilling to support the necessary tax increases.

"We don't have the money to pay for it," Sen. Tom Berryhill (R-Modesto) told the Los Angeles Times last week after the HCA cleared California's state Senate.

"I absolutely don't trust the government to run our health system," he added. "What has the government ever done right?"

(The original version of this post contained a reference to value-added taxes, or VATs, that was incorrect and unnecessary. It has been removed).