“Universal” government health care has once again returned as a political cause, with many Democrats believing it’s the key to White House victory in 2008. They might want to study last week’s news from Illinois, where Democratic Governor Rod Blagojevich’s tax increase to finance health care became the political rout of the year.

The Democratic House in Springfield killed the proposal, 107-0, after Mr. Blagojevich came out against his own idea when it became clear he was going to be humiliated. Only a month earlier he had said he was prepared to wage “the fight of the century” in defense of his plan to impose a $7.6 billion “gross receipts tax” on Illinois businesses.

Easily re-elected in November, the Governor used every trick in the “progressive” political playbook to sell his proposal. Instead of a general tax increase, he claimed it would be “targeted” for universal health care and education. Instead of raising individual taxes, he aimed at business and even built in an exemption for smaller firms. “These corporate guys, they can’t avoid this tax,” declared the Governor, sounding one of the “populist” themes that liberal columnists are now recommending for national Democrats.

Mr. Blagojevich also pitched his plan as a moral imperative, unveiling it while standing in the Fourth Presbyterian Church in Chicago and saying it was necessary to force businesses to pay their “fair” share of the tax burden. He wanted to force most employers to offer health insurance or pay a 3% payroll tax. Liberal special interest groups–including the state AFL-CIO and the Illinois Education Association–initially supported him.

But a funny thing happened on this road to Canadian health care. The state’s more rational Democrats revolted, arguing it would drive businesses out of Illinois. Chicago Mayor Richard Daley was an early opponent, and Democratic Lieutenant Governor Patrick Quinn was cool to it. House Speaker Michael Madigan very publicly withheld his support and last week came out against the tax hike.
As tax increases go, this was one of the worst. 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.

Mr. 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.

Read the whole article at Opinion Journal

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Election 2008, Taxes