Oregon Ballot Measure Would Yield Sky-High Business Tax Rates

The all-in Oregon state and local taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
rate on large businesses could exceed 56 percent under a proposed ballot measure that purports to impose only a small tax increase on large businesses.

The website for the IP-17 effort, which establishes a 3 percent corporate minimum tax on Oregon gross sales above $25 million, offers the following supposed fact: “Fact: The largest corporations pay less than 1% in Oregon tax. We all pay between 5-10% in Oregon tax. Is that right? No! So we start to fix that.”

This is not a fact by any known definition of the word. Oregon C corporations face a 7.6 percent corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.
and a 0.57 percent gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding.
, and if they’re in the Portland area, they are subject to several other city, county, and regional taxes: a 2.6 percent business license tax, a 2 percent business income tax, a 1 percent Supportive Housing Services Tax, and a 1 percent Clean Energy Surcharge, all of which are additional taxes on net income. The upshot is a combined state-local tax of 14.2 percent on corporate net income, plus a 0.57 percent tax on gross receipts. (Oregon is one of only two states, with Delaware, to impose both a gross receipts and a corporate income tax.) This already yields one of the highest business tax burdens in the country.

Furthermore, gross receipts tax rates cannot be compared with corporate income tax rates. The latter are on net income (profits), whereas the former are on gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.”
(all sales revenue sourced to the state). Under Oregon’s Corporate Activity Tax (CAT), businesses pay 0.57 percent on all revenue, less a deduction for 35 percent of either compensation or costs of goods sold (COGS), but not both.

Imagine that a business’s profits are 7 percent of gross revenue, which is fairly typical. (Some business models tend to have higher profits, but conversely, grocery stores and other big box retailers often have profit margins of 2 to 3 percent.) A 0.57 percent gross receipts tax rate would be equal to an 8.14 percent net income tax rate absent before accounting for the deduction. If we assume that payroll and COGS costs are identical (a simplifying assumption), then after the deduction of 35 percent for one of them, the comparison would be to a 6.72 percent corporate income tax. This, of course, coming atop the existing 7.6 percent corporate income tax, and in addition to the other 6.6 percent in combined income taxes imposed in the Portland metro area.

Under IP-17, Oregon’s corporate income tax will contain a gross receipts-based minimum of 3.0 percent—which is like imposing a 42.9 percent corporate income tax if profits ran 7 percent! Add in the calculated equivalent rate of the existing gross receipts tax and you’re at 49.6. Then, of course, there’s the federal income tax of 21 percent, and if in Portland, another 6.6 percent in other business income taxes. Suddenly, for a business with 7 percent profit margins, the all-in rate on net income for sales into Portland would be about 77.2 percent for large businesses (federal, state, and local combined).

Unlike corporate income taxes, which are levied on profits, or sales taxes, which are (mostly, but imperfectly) levied on final sales, gross receipts taxes are levied at each stage of the production process, and on total receipts, not net. This is why, when states levy them at all, they are forced to keep rates low. Washington’s rate on retail is 0.471 percent. Ohio’s universal rate is 0.26 percent. Nevada’s retail rate is 0.111 percent. In all three states, the tax is in lieu of a corporate income tax, not in addition to one.

What’s proposed here is not only to retain Oregon’s existing gross receipts tax, but to turn the corporate income tax into an extremely high-rate gross receipts tax as well, at least for large businesses.

The proposal may sound like the sort of alternative minimum tax (AMT) that six states still levy (which is already bad policy), but it is fundamentally different. Traditionally, AMTs strip essentially strip away the benefit of certain deductions, exemptions, and credits, ensuring that a minimum effective rate on net income is achieved. But the Oregon proposal uses gross income. It is completely indifferent to profits; it would be imposed even if the corporation ran a loss.

Consider a company that sells a product for $100, of which $7 is profit. Under the corporate income tax, if they had no deductions, exemptions, or credits, the company might owe $0.53 (7.6 percent of $7 in profits). But perhaps the company had losses the year before, which it can carry forward, or perhaps it made significant capital investments that qualify for cost recoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages.
, reducing its share of taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.
. An ordinary 3 percent AMT would ensure that the company still pays at least $0.21 on the sale, even if the company were carrying forward losses or had other tax adjustments. But 3 percent on gross (the $100 sales price) would be $3 on that $7 in profits, a 42.9 percent effective rate—and would in fact be $3 even if the company made nothing in profits on the sale.

If you think that an all-in state and local rate of 56 percent is implausible (77 with the federal corporate income tax), you’re probably right, in a sense. It’s not feasible that businesses will absorb this. And because the tax will be imposed on all large businesses based on their receipts in Oregon, we can expect much of the incidence to be passed along to Oregon consumers.

Oregon famously forgoes a sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.
. This proposal is worse—much worse. In Washington, revenue officials see a statewide average “pyramiding” of four times the statutory tax rate. If that held in Oregon, consumers would expect to see about a 12 percent price increase. It wouldn’t be itemized on the receipt, but it would be like having the nation’s highest sales tax, in a state that ostensibly has none.

In practice, affected businesses would likely move more of their operations out-of-state to avoid this. The final sale can’t be moved out of Oregon, of course, and most (but not all) of the incidence of that 3 percent imposed on the last transaction would likely be passed along to consumers. (This would be limited to some degree by the fact that smaller competitors wouldn’t face this tax cost.) But the more intermediate steps that can be moved out of state, the better for companies. And for Oregon-based businesses selling to a national or global market, the fewer manufacturing receipts sourced to Oregon, the better. The way you avoid facing a functionally 56 percent all-in state and local tax rate is by taking as many of your business processes out of Oregon as you can.

That hardly seems like a recipe for Oregon’s success.

Proponents of IP-17 want to use the revenue from the tax increase to fund an annual rebate check, which they estimate at $750 per person on the assumption that the tax will raise at least $3 billion in additional revenue. That might sound good. But if it raises the cost of goods, drives jobs and economic activity out of state, and puts Oregon-based businesses at a massive disadvantage with their out-of-state competitors, it’s likely to be an awful deal for Oregonians.

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