Joint Committee Meets On Business Tax Reform Quest
Guest Opinion
May 2, 2017

A Joint Committee of the Oregon Legislature met today to continue efforts to reform Oregon’s business tax system. Sen. Mark Hass (D-Portland) and Rep. Phil Barnhart (D-Eugene) serve as co-Chairs for the Joint Committee on Tax Reform. Increasing business taxes has been a focus for Hass for several years, and previously resulted in Measure 97 – which would have created a Gross Receipts Tax on business, but was handily defeated by Oregon voters last year.

Oregon currently charges a business income tax which some Legislators believe is too vulnerable to economic downturns and too volatile even during good economic conditions. A replacement for Measure 97 – i.e. a Gross Receipts Tax (GRT) that taxes all of the income a business earns at a low rate whether the business is profitable of not – is one of the main options available. The other would be a “Corporate Activity Tax” (CAT) which would be similar to a system adopted by Ohio in 2006. It would also seek to charge a low rate, but only on Oregon sales. It would apply to any Company that sells products in Oregon, even if it located elsewhere.

Both taxes have strengths and weaknesses. Both would be able to charge a low rate by “broadening the base” – increasing the number of Companies and business income subject to the tax. Ohio’s CAT, for instance, has a rate of ¼ of 1 percent. Both would also avoid any conflict with federal law requiring a business to have sufficient “nexus” in a State to be taxed by that State.

However, both ideas also have weaknesses. In particular, Legislative Revenue Office Director Paul Warner noted that these business taxes – like the current business income tax – would, at least to some degree, be passed along to consumers. This caused Warner to include a series of steps the Committee might propose that would reduce the regressive nature of these ideas, including an increase in the State’s Standard Deduction, providing a lower bottom personal income tax rate or increasing the personal exemption. The GRT would put Oregon Companies who export a lot of product or services at a competitive disadvantage and the idea is also not very popular on the State level. Only one other State currently has a Gross Receipts Tax with New Jersey and Indiana recently repealing theirs.

The CAT’s other weakness is it leaves open the possibility of “pyramiding” wherein the tax is charged at each step of a process from raw materials purchase, to manufacturing, to retail sale. In addition, the tax makes no distinction based on an industry’s profit margin. As noted during questioning, grocery stores operate at very low margins, sometimes in the 1 – 2 percent range, and even a small tax on all their sales can be a large burden.

A Corporate Activity Tax could raise a net increase of $288 million in the current biennium if instituted in January of 2018 at a ¼ of 1 percent rate. It would then generate about $450 million in succeeding biennia, not including any reductions in personal taxes to offset the regressive nature of the tax. A ¾ of 1 percent rate is estimated to raise about $3.5 billion per biennium beginning 2019-21. Businesses with less than $150,000 in Oregon sales would be exempt from the CAT, and those with between $150,000 and $1 million would pay $250. Businesses with more than $1 million would pay $250 plus whatever rate is chosen on sales over $1 million.