During 2016, the voters of Oregon will have a chance to vote on Initiative Petition 28 (IP 28). IP 28 purposes a 2.5 percent gross receipts tax on any Oregon sourced gross receipts in excess of $25 million for C-Corporation.
In order for Oregon voters to make an informed decision on IP 28, it is important for them to separate fact from fiction which is being stated by supporters of the initiative. Below are three arguments made by supporters of IP 28 that have not been represented clearly and deserve a clarification for Oregon voters.
#1 – Many supporters of IP 28 cite a report issued by Ernst & Young (an accounting firm) to the independent and non-partisan Council on State Taxation, that Oregon presently has the lowest business taxes in the U.S. Proponents use this as a reason for supporting IP 28. My issue with this argument is that the supporters don’t give you the entire findings of the report.
To summarize, the report states that Oregon ranks among the lowest in the nation in terms of corporate tax burden due to its lack of a sales tax which accounts for more than 21% of state and local business taxes nationwide. The report further states that if the sales tax was excluded from the calculation for all states, Oregon would move from 50th lowest to 20th lowest.
Therefore, the argument that Oregon has one of the lowest business taxes in the US when compared to other states is misleading due to the fact that the report is comparing apples to oranges when it says that Oregon has the lowest business taxes. According to TaxFoundation.org, Oregon actually has the 19th highest corporate income tax rate in the nation.
Due to the inability of Oregonians to pass a state wide sales tax, which would affect both individuals and corporations, IP 28 is basically pushing the burden of a sales tax to corporations through what is being called a corporate minimum tax.
#2 – Another argument used by supporters of IP 28 is that Oregon corporations can escape paying taxes in Oregon due to the fact that the Oregon Business Energy Tax Credits (“BETC”) can offset the Oregon minimum tax. Supporters will state that corporations will purchase BETC credits in order to reduce the corporate taxes to zero and therefore avoid paying their “fair share” of Oregon taxes.
This argument is misleading because on July 20th, 2015 the governor signed legislation that prohibits corporations from using tax credits to offset the corporate minimum tax for years beginning after January 1, 2015 and before January 1, 2021. Therefore, going forward (until 2021) corporations can’t purchase BETC credits to reduce their minimum taxes. This will increase tax collections by the state from corporations which makes this argument mute.
If additional steps want to be taken by the state to ensure continued tax collections from corporations, additional legislation should be introduced to make the original legislation permanent rather than have it expire in 2021.
#3 – The final argument supporters of IP 28 use is that the increased minimum tax will effect mostly out of state businesses. To be fair, there is some truth to the argument, however, from personal experience as a certified public accountant, I know there are many Oregon businesses which will be significantly affected by this tax. I worked with an Oregon based client, which created a niche for itself by provided goods and services to rural towns throughout the state. Such towns included Waldport, Creswell, Walterville, Yachats, etc. The towns were small enough that the “big boys” / “big business” wouldn’t do business there. The company had a high volume / low margin business model which meant the company’s sales were high but had low profit. For a year or two, even though the company had gross sales of greater than $100 million, it sustained losses. If the proposed law was in place when the company sustained the losses, it would have had to pay in excess of $2,500,000 in Oregon minimum tax rather than $100,000 of minimum tax under the current law, even though it didn’t make a profit. If the company had to pay in excess of $2,500,000 in taxes, the financial health of the company would have been compromised and may have required the company to either close some of its locations or raise prices by at least 2.5% to have the cash to pay the taxes.
Despite how supporters IP 28 frame this argument, IP 28 will effect Oregonians and Oregon business through higher prices or closing certain businesses / locations.
In conclusion, finding additional funding for Oregon schools is no easy task. I do agree school funding must be a priority. However, there are much better and more fair ways the Oregon tax system could be changed in order to increase the collection of state taxes (which is another discussion) than through IP 28.