On Thursday evening, the Oregon Joint Committee on Student Success held a hearing on House Bill 2019 and two amendments. The first amendment outlines the Committee’s plans to improve Oregon’s public education system. The second amendment provides details on how the Committee will raise the $1 billion in annual revenue required to support the public education system improvements.
After three months of evaluation, the Committee decided to propose 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. —entitled the Corporate Activity 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. —imposed on business receipts above $1 million, levied at a flat 0.49 percent tax rate. The tax permits a 25 percent deduction of gross receipts for the greater of either business purchases or a firm’s labor costs. Receipts from the retail sale of groceries are exempt to help mitigate some of the expected regressivity of the proposed tax. This new tax is paired with reductions to the personal income tax rates and adjustments to the personal income tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. s.
|Tax Bracket||2019 Tax Rate||Proposed Tax Bracket||Proposed Tax Rate|
|Taxable income over $0||5.0%||Taxable income over $0||4.75%|
|Taxable income over $3,550||7.0%||Taxable income over $2,000||6.75%|
|Taxable income over $8,900||9.0%||Taxable income over $5,000||8.75%|
|Taxable income over $125,000||9.9%||Taxable income over $125,000||9.9%|
The structure of the gross receipts tax is a hybrid of Ohio’s Commercial Activity Tax, which levies a flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. rate on a firm’s gross receipts, and Texas’ Margin Tax, which permits, among other options, a deduction for a firm’s wages or cost of goods sold. This proposal is the outcome of deliberations from the Revenue Subcommittee, which evaluated a proposed value-added tax and a gross receipts tax that would permit full deductibility for labor compensation or business inputs.
As we have argued, a gross receipts tax that allows for a deduction for business inputs or labor costs creates complexity for business taxpayers without mitigating 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. . It may also not be a stable source of revenue, as the experience Texas had with its Margin Tax shows. The Oregon Legislative Revenue Office (LRO) ran the proposed tax in its model on April 8th, finding that low-income households had the largest decrease in household income—0.3 percent—showing that that the personal income tax reductions and exemption for groceries failed to mitigate the regressivity of the tax.
There will likely be further discussion over how much of a firm’s labor costs or business inputs should be deductible under the tax. The Committee may consider an option to permit full deductibility of those costs, but this would come at the trade-off of a higher tax rate—0.90 percent—to ensure the tax raises the $1 billion in required revenue. Likewise, a gross receipts tax with no deductions for business costs would allow policymakers to levy a lower rate—0.37 percent—at the cost of greater tax pyramiding. The LRO’s models suggest that the benefits of a greater deduction are mostly offset by the rate increase.
The debate over how to raise revenue for Oregon’s public schools comes at a time when the state legislature is considering other tax proposals. These include a bill that would enact a cap-and-trade system to limit carbon emissions and higher taxes on tobacco to help fund Oregon’s Medicaid system. This makes it important for the legislature to consider how a poorly designed business tax will affect Oregon’s economic prospects and competitiveness.
The Committee is moving quickly on the education bill and the tax amendment to avoid a possible teacher walkout on May 8th. The legislature should avoid enacting a poor revenue option to expedite the process. Doing so would harm Oregonians’ incomes and economic growth without changing the long-term prospects for Oregon’s public education system. Allowing Oregon firms to deduct all costs except for the value they add in the production process would be more economically efficient while raising the revenue the state needs.
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