Measure 97 continues to dominate the airwaves in Oregon as both supporters and opponents launch their campaigns on the ballot measure. The $6 billion 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. increase would cost households in Oregon approximately $600 a year and raise prices by 1 percent. As supporters work to convince Oregonians to support the proposal, they continue to use the same talking point: Oregon ranks last among the states on corporate taxes. This talking point, however, is misleading.
There are a number of different ways to attempt to quantify Oregon’s relative rank on corporate taxes. Comparing Oregon’s top marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. (7.6 percent) is one way; it is the 18th highest nationally. Another way is to consider how much money 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. raises in revenue on a per capita basis. In fiscal year 2014, Oregon’s corporate income tax collected $125 per capita, or 26th highest in the nation. A third way would be to consider how Oregon’s corporate tax code is structured. Our State Business Tax Climate Index ranks Oregon 37th nationally for overall corporate income tax structure. No way is perfect, as they each represent a different concept.
But the supporters of Measure 97 are not using this sort of data. They are using a report that quantifies business tax burdens and suggesting that it is the same thing as corporate tax burdens. Businesses and corporations, in this context, are not the same thing.
The report, “2016 State Business Tax Burden Rankings” from the Anderson Economic Group, focuses on business tax burdens, which is a much larger category, rather than corporate tax burdens. Businesses come in many different shapes and sizes, and they file their taxes in a variety of different forms too. Businesses are generally divided into two big categories: 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. es or C corporations. Only C corporations file their taxes under the corporate tax code. Pass-through businesses file as individuals as the income “passes through” to the owners of the business.
The AEG report includes all businesses, not just C corporations, and includes 11 types of taxes that businesses pay. The corporate income tax is just one of those taxes included. The report includes other taxes, such as property taxes, sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es, 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. es on pass-through income, motor vehicle taxes, among others. The report specifically says “the corporate income tax is often seen as the most important state or local tax on businesses. However…of the 11 categories of state and local taxes we identify, corporate income taxes account for under 10% of the total tax burden for all states combined.”
This distinction is important. Oregon’s business tax burden is the lowest in the country according to this report, not because corporate taxes are low, but rather, because the state doesn’t have a sales tax. It is the absence of a sales tax driving this ranking, not low corporate income taxes. The report hammers this point home: “Oregon has no general sales tax, but otherwise is not among the ten lowest-burden states in any particular tax category.”
The State Business Tax Climate Index shows a similar result. The 37th rank noted above is for corporate income taxes, but the state is 11th overall, due to the absence of a sales tax and low property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es.
This is not the first time that I have mentioned the misuse of the AEG data by Our Oregon. When the Oregon Consumer League and Our Oregon released their report in July on the relationship between state taxes and prices, I pointed out the issue at the time. I said:
“The report misuses a number of tax terms. For its measure of taxation, it uses a calculation of state business tax burdens. This is a broad measure that includes 11 types of taxes, including non-corporate taxes such as individual income taxes on pass-through businesses. It is a much broader measure than taxes on C corporations. Oregon ranks low on this measure, because of the state’s low property taxes and absence of a sales tax, not because corporate income taxes are low. The authors, however, seem to misunderstand their own data and use ‘corporate taxes’ and ‘business taxes’ interchangeably. These two terms are not synonymous.”
Supporters are also using a report from the Council on State Taxation (COST) to make a similar point on low corporate too. But again, the COST study is a measure of business taxes, not corporate taxes. This report notes that Oregon’s low burden is due to its “lack of a sales tax.” The report continues to say, “If sales tax revenue is excluded…[Oregon] moves from the lowest TEBTR [rank] to the 20th-lowest rate.”
All of this is not to say that Oregon’s corporate income tax structure is without flaws; its bottom third ranking on the State Business Tax Climate Index’s corporate income tax subcomponent is a testament to its poor structure. But it’s not true to say that Oregon ranks last on corporate taxes.
I know that Our Oregon read my initial comments on the difference between business taxes and corporate taxes, but the error still continues. It is hard to have the important debate on Oregon’s corporate income taxes and Measure 97 when the supporters are being misleading with basic tax data.
For more on Measure 97, click here.
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