Oregon State Senator Mark Hass (D), chair of the Oregon Senate Finance and Revenue committee, has released a new proposal to overhaul Oregon’s corporate income tax structure. Senator Hass’s proposal would repeal Oregon’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. and replace it with a 0.39 percent gross receipts tax on in-state sales above $1 million. This proposal is misguided. Gross receipts taxes are harmful to economic growth.
Gross receipts taxes are different than corporate income taxes. Instead of taxing a firm’s net profits, gross receipts taxes are taxes on a firm’s sales. This results in tax pyramiding as the 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. ’s burden is shifted forward through the production cycle, putting extra pressure on industries with longer cycles, such as retail and manufacturing. It also doesn’t make allowances for firms who are struggling. Firms who are losing money would still pay money under a gross receipts taxA gross receipts tax, also known as a turnover tax, is 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. .
Oregon’s own Legislative Revenue Office (LRO) presented to the Senate Finance Committee regarding the effects of a 0.4 percent gross receipts tax in Oregon. The LRO said that the new gross receipts tax would increase the state’s revenue, but it would hurt Oregon’s economy. The new tax would reduce total state employment by 9,018. It would increase public sector employment, but would eliminate 15,000 private sector jobs, concentrated in the retail and manufacturing sectors.
The tax would also reduce household income across the spectrum. Below is the distributional table included in the presentation:
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Distributional Effects of a 0.4% Gross Receipts Taxes in Oregon |
||
|
Household Income Groups |
Change in Average Household Income |
Percent Change in Average Household Income |
|
<$20,587 |
($121) |
-0.29% |
|
$20,587-$34,311 |
($168) |
-0.30% |
|
$34,311-$48,036 |
($193) |
-0.29% |
|
$48,623-$68,623 |
($217) |
-0.29% |
|
$68,623-$102,934 |
($276) |
-0.30% |
|
$102,934-$137,246 |
($329) |
-0.27% |
|
$137,246-$205,869 |
($418) |
-0.24% |
|
>$205,869 |
($604) |
-0.17% |
To mitigate some of these distributional effects, Senator Hass includes an expansion of the state’s earned income tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (EITC) and doubles the standard deduction in his proposal.
All told, the proposal would generate $1 billion in new revenue; half of the new revenue would go to education.
The LRO did new analysis of this broader plan, including the corporate income tax repeal, and the EITC and standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. expansion, and found that it would increase employment by 4,554 jobs, but the bulk would be public sector jobs. It also would cut personal income for a large number of Oregon taxpayers. Disposable personal income would decrease for taxpayers making more than $34,311.
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Distributional Effects of Senator Hass's Proposal in Oregon |
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|
Household Income Groups |
Change in Average Household Income |
Percent Change in Average Household Income |
|
<$20,587 |
$77 |
0.19% |
|
$20,587-$34,311 |
$89 |
0.16% |
|
$34,311-$48,036 |
($96) |
-0.15% |
|
$48,623-$68,623 |
($186) |
-0.25% |
|
$68,623-$102,934 |
($295) |
-0.32% |
|
$102,934-$137,246 |
($388) |
-0.31% |
|
$137,246-$205,869 |
($510) |
-0.30% |
|
>$205,869 |
($671) |
-0.19% |
Even with the small increase in employment, replacing a corporate income tax with a gross receipts tax is a wrong approach. Senator Hass’s proposal is modeled off of Ohio’s commercial activities tax (CAT). We’ve written frequently about the harmful effects of Ohio’s CAT.
Senator Hass’s proposal is an alternative to a $5 billion tax increase pending for their November ballot. The initiative would create a 2.5 percent gross receipts tax on firms with more than $25 million in Oregon sales. The LRO is expected to release full analysis of this proposal in the near future, but its economic effects could likely dwarf those of Senator Hass's proposal.
Senator Hass presents an alternative to November’s pending ballot initiative, but replacing Oregon’s corporate income tax with a gross receipts tax is a bad idea.
For more information on gross receipts taxes, click here.
Follow Nicole Kaeding on Twitter at @NKaeding.
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