The Oregon legislature began its session on February 1st and is already on its way to trying to find ways to close its $1.8 billion deficit. Some are small, such as the proposed excise tax on coffee. Others are larger, like the new gross receipts 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. , proposed by the Oregon Senate yesterday.
Under the proposal, Oregon would create a new “business privilege tax,” in the form of a gross receipts taxA gross receipts tax is a tax 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. . The tax would be 0.7 percent on all sales in excess of $5 million. Filers with sales of less than $5 million would pay a flat $250 year, and those below $150,000 would be exempt from even filing a return.
The gross receipts tax would apply to all businesses, regardless of their legal structure, meaning that pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. , which generally file under the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , would also be subject to this tax. The proposal does not repeal the state’s 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. , but instead is in addition to the tax.
Uniquely, this proposal takes the form of a constitutional amendment, not a piece of legislation. The special election would occur May 16, 2017. Oregon has an origination clause in its state constitution, so proposing this as an amendment could be a way for the Senate to start conversations on a gross receipts tax, without violating constitutional restrictions.
Oregon continues to explore creating a new gross receipts tax on its quest for more revenue and greater revenue stability. Measure 97 failed in November, and this is now the third additional gross receipts tax proposal in Oregon since Measure 97’s defeat.
Proponents of a gross receipts tax in Oregon continue to hold up Ohio and its commercial activities tax (CAT) as an example of a state with a commercial activities tax that is successful. Just this morning, my colleague, Jared Walczak, wrote about the challenges posed by the CAT. (West Virginia is also considering a similar proposal.)
Under the Ohio CAT, a firm with a profit margin of 1 percent faces a 26 percent effective tax rate on corporate net income, which is notable given that some industries do run on average profit margins of just a few percent, and of course some companies experience actual losses. An Ernst & Young (now EY) study applied average profit ratios for major industries to estimate effective tax rates under the CAT, and found rates ranging from 0.4 percent (management of companies) to 8.6 percent (construction), with a weighted average of 4.7 percent on a 0.26 percent gross receipt tax, just slightly higher than what has been proposed in West Virginia. Other industries with above-average tax rateThe average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes. s under the Ohio CAT include wholesale (8.3 percent), retail (7.9 percent), and transportation and warehousing (7.0 percent), all low-margin enterprises.
In many ways, gross receipts taxes are a throwback to an earlier era. Once common due to their ease of administration, these taxes were largely abandoned over the course of the 20th century as states sought to modernize their tax codes and jettison their least competitive components. More recently, however, with corporate income tax revenues declining sharply, gross receipts taxes have seen a resurgence, adopted in Ohio, Nevada, and Texas, and currently under consideration in the Oregon legislature following the defeat of a high-rate gross receipts tax on the state ballot last November.
The tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. has consequences for Oregonians, through higher prices or fewer job opportunities. (While this proposal is not directly comparable to the empirics of Measure 97, the direction of results would be similar.)
Oregon legislators continue to flirt with a gross receipts tax, a flawed, outdated type of taxation. In the state’s quest for more revenue, legislators should explore other options.Share