Oregon to Decide Whether to Restructure Corporate Taxes

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

By Paul Shukovsky

Oct. 25 — Voters will decide Nov. 8 whether to transform Oregon’s corporate tax base from one determined mostly by net income to one determined mostly by Oregon sales or gross receipts of a relatively small group of large corporations.

If Measure 97 passes, it will extract $6.1 billion in revenue from about 1,000 corporations over the 2017-19 biennium, according to a report from the state Legislative Revenue Office. If it had been in force for the 2013 tax year, the state would have collected about $2.9 billion as opposed to the $461 million received under current law.

The new revenue is intended to benefit early childhood and K-12 education, health care and senior services.

Measure 97 would require C corporations or affiliated groups of corporations filing a return under Or. Rev. Stat. Section 317.710 that have Oregon sales of more than $25 million to pay a minimum tax of $30,001 plus 2.5 percent of the excess over $25 million.

Dead Heat

Passage is a prospect that doesn’t sit well with many corporations, judging by an outpouring of more than $22 million in contributions to defeat the measure through Oct. 17 from a broad array of businesses. In just three days—from Oct. 14-17—Costco Wholesale Crop., Alberstons-Safeway and Kroger/Fred Meyer made donations of $900,000 each, the Oregon Secretary of State website shows. Other big donors include Lithia Motors, Inc., the Oregon Association of Realtors, Chevron Corp., Equlion Enterprises LLC, Cambia Health Solutions Inc. and Weyerhaeuser Co.

The measure is an initiative brought by public employee unions that have donated more than $10 million to the “Yes on 97" campaign through Oct. 17. The Oregon Education Association has donated $3.15 million, followed by $2 million from Service Employees International Union Local 503, $1.85 from the National Education Association, $1.5 million from the Oregon American Federation of State County and Municipal Employees Council 75, $1 million from the SEIU and $500,000 each from the American Federation of Teachers and the AFT Oregon Issue PAC.

In June, Measure 97—then called Initiative Petition 28—led in polling with 65 percent in favor, 19 percent opposed and the rest undecided. But a poll commissioned and reported Oct. 18 by the state’s largest newspaper, The Oregonian/Oregon Live, showed a statistical dead heat with 47 percent opposing the measure and 46 percent in favor of it, with a margin of error of 3.97 percentage points.

Recent Oregon electoral history shows that money doesn’t necessarily bring victory at the ballot box. In May 2014, a big influx of global agribusiness dollars failed to turn the tide in a local county ban on genetically engineered crops despite outspending their opponents by a ratio of 3-1.

Will Consumers Feel the Pain?

Backers of No on 97 have been wrangling with proponents of the measure over the extent to which the tax would be passed on by corporations to consumers.

“Oregonians have long cherished the fact that the state does not impose a general state sales tax,” Jared Walczak, a policy analyst with the conservative Tax Foundation, told Bloomberg BNA Oct. 24. Though specifying Measure 97 as a gross receipts tax, he said, “This is a sales tax on steroids. It has the potential to pyramid where the tax cost is embedded in the final price of products many times over” as each level of the supply chain passes on the tax cost to the next level until reaching retail.

Chuck Sheketoff, executive director of the progressive think tank Oregon Center for Public Policy, rejects the pyramiding argument. “This isn’t a gross receipts tax, it is an income tax. Only those who have nexus to the state are taxed. The vast majority of the items sold in the grocery store are manufactured by companies that are never taxed in Oregon. Kellogg may sell tens of millions of dollars of corn flakes in Oregon, but if they don’t have nexus, then Kellogg doesn’t pay the tax. So how could there be pyramiding?”

Proponents also maintain that competition, particularly online competition, will prevent the costs of the tax being passed on to consumers.

‘Tax Exporting a Broader Trend.’

Legislative Revenue Officer Paul Warner told Bloomberg BNA in May that if the measure passes, the impact on prices is estimated to be “a little less than 1 percent increase,” resulting in what he called “a marginal change towards regressivity. The change is pretty minor.” His report also projects an increase in income stemming from an increase in public-sector jobs.

“The measure will also create a competitive advantage for out-of-state C-Corporations that sell into the state but are apportioned using the cost of performance method or do not meet corporate tax nexus requirements. However, by focusing the tax base on large C-Corporations, IP 28 may lead to greater exporting of the tax beyond the state’s boundaries,” Warner’s report says.

Economist Nicole M. Kaeding of the Tax Foundation, in a Oct. 24 e-mail to Bloomberg BNA, criticized the potential for increased federal deductions for C corporations if the measure passes. While it is a gross receipts tax, it is technically a corporate minimum income tax for federal tax purposes, she said. “Unfortunately, this is part of a broader trend. Tax exporting is a common facet of state tax policy. States do not shy away from shifting the burden of taxation from in-state residents and businesses to out-of-state payers, but that doesn’t make it good tax policy.”

Stabilizing State Revenue

The Legislative Revenue Office report also says that shifting the tax base toward the Measure 97 gross receipts tax structure would reduce the instability of state revenue while simultaneously “reducing proportional reliance on personal income and virtually eliminating reliance on corporate net income tax.”

Warner told Bloomberg BNA in a July 28 e-mail that his report “does not account for potential longer term impacts on the productive capacity of the economy from spending in areas such as education and infrastructure. We did not include these effects because there would need to be specific program level assumptions about spending for example early child hood education compared to community college programs. We don’t have that level of detail and would be uncomfortable making those kind of assumptions about how the Legislature would spend the new revenue.”

To contact the reporter on this story: Paul Shukovsky in Seattle at PShukovsky@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

Text of Measure 97 is at http://src.bna.com/jHq.

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