Oregon’s Corporate Activity Tax, 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. levied on businesses with receipts over $1 million, is one step closer to facing voters in early 2020 after an association of Oregon industrial businesses filed a referendum to repeal 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. this week. The referendum is an opportunity for Oregonians to determine if the tax is the best method of financing improvements to the state’s K-12 public education system and consider alternative methods that may not be as economically damaging to the state.
Under the Oregon state constitution, Oregonians may directly initiate ballot measures and referenda. In the latter case, citizens may vote to overturn statutes passed by the state legislature via a simple majority. Two and a half years after successfully defeating Measure 97, a previous gross receipts tax proposal, at the polls, supporters of the referendum hope that Oregonians will strike down the state’s gross receipts tax months after the state legislature approved it.
Supporters of the referendum must obtain 75,000 signatures within 90 days for the referendum to appear on the ballot. The referendum would likely appear during a special election in early 2020, ahead of when the Oregon Department of Revenue (DOR) begins to administer the tax. The referendum only includes the provisions spelling out the gross receipts tax in House Bill 3427, omitting the reduction in Oregon’s personal income tax rates and the provisions improving K-12 public education in Oregon.
The Corporate Activity Tax threatens to harm manufacturers in Oregon, as manufacturing is particularly sensitive to gross receipts taxes. Manufacturing typically involves multiple stages of production as goods are created, increasing 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. that is generated in the sector. In nearby Washington, a study of the state’s Business & Occupation (B&O) tax found that manufacturers experienced tax pyramiding ranging from 2.3 times to 6.7 times on average, above the statewide tax pyramiding average of 2.5.
Oregon’s manufacturing sector comprises 20 percent of the state’s gross domestic product (GDP), or about $47.2 billion. As a proportion of state GDP, the sector is the second largest in the United States, after Indiana. Manufacturers employed about 189,000 people in 2017, accounting for about 11.9 percent of all private-sector employment in Oregon. Manufacturers in the state may respond to the tax by increasing prices paid by consumers, lowering worker compensation, reducing jobs in the state, or reducing shareholder value for those firms.
Manufacturing is not the only sector in Oregon that may be harmed by the gross receipts tax. While HB 3427 exempted groceries, gasoline, and health care, many other Oregon businesses and consumers will be subject to the levy. Low-income Oregonians are especially vulnerable, as the Corporate Activity Tax is regressive, and the reduced personal income tax rates will not fully offset the higher prices low-income Oregonians will experience when the tax takes effect.
As referendum supporters gather signatures and voters consider the merits of the Corporate Activity Tax, it is important to consider the alternative ways to fund the improvements in K-12 public education. A value-added tax, which would exempt business inputs and assess one levy on economic value in Oregon, would be a more economically efficient option that voters and policymakers should consider.
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