Oregon’s proposed ballot measure, IP-17, purports to impose only a small tax increase on large businesses. However, the reality could be far more severe. The measure establishes a 3 percent corporate minimum tax on Oregon gross sales above $25 million. The proponents of IP-17 argue that the largest corporations pay less than 1% in Oregon tax, while the average citizen pays between 5-10%. They believe this measure will rectify this disparity. However, this argument oversimplifies the complex nature of corporate taxation.
Currently, Oregon C corporations face a 7.6 percent corporate income tax and a 0.57 percent gross receipts tax. In the Portland area, they are subject to several other city, county, and regional taxes, leading to a combined state-local tax of 14.2 percent on corporate net income, plus a 0.57 percent tax on gross receipts. This already places Oregon among the states with the highest business tax burdens.
Under IP-17, Oregon’s corporate income tax will contain a gross receipts-based minimum of 3.0 percent. This is equivalent to 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, 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 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. 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, but it is fundamentally different. Traditionally, AMTs 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.
If you think that an all-in state and local rate of 56 percent is implausible, 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.
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 of the incidence of that 3 percent imposed on the last transaction would likely be passed along to consumers. 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.
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.
As a tax attorney, I urge Oregonians to consider the potential implications of this proposed tax increase. It’s crucial to understand the full picture before making a decision that could have far-reaching consequences for the state’s economy.