Oregon Another Step Closer to a Gross Receipts Tax Funding Public Education

April 30, 2019

Last night, Oregon’s Joint Committee on Student Success passed House Bill 3427, which raises about $2 billion over the next biennium to improve the state’s public school system. The improvements will be funded via a gross receipts tax, entitled the Corporate Activity Tax, levied on businesses with commercial activity over $1 million. Included in the bill is a reduction in Oregon’s individual income tax rates for those making less than $125,000 by 0.25 percentage points for each tax bracket.  

The bill will require a three-fifths supermajority approval in the legislature to be enacted as per Oregon’s constitution, as the bill includes a new revenue-raising mechanism for the state. If the bill fails to earn a three-fifths supermajority in the legislature, voters must consider the proposal via a ballot initiative.

After discussions with businesses in the state, the Committee increased the deduction options for firms from 25 percent to 35 percent of labor compensation or business input costs. To ensure that the tax raises the $2 billion target for the biennium, the Committee raised the tax rate from 0.49 percent to 0.57 percent. Lawmakers excluded dairy farms and agricultural co-operatives from the tax base in addition to the exemption on the wholesale or retail sale of groceries.

In final form, the Corporate Activity Tax deduction for the cost of business inputs will only include cost of goods sold (COGS), omitting the unsold inventory that was originally deductible. This narrows the deduction and increases the potential for tax pyramiding.

In addition to the economic costs and harm to low-income Oregonians that will be created by the gross receipts tax, there is a risk that a future state legislature may consider a reduction or elimination of the deduction for business inputs or labor compensation to raise more revenue. In City of Seattle v. Department of Revenue (2015), the Oregon Supreme Court determined that repealing a tax expenditure is not considered a bill for revenue-raising by the legislature, which requires the three-fifths supermajority to enact. Instead, changes to tax expenditures such as the Corporate Activity Tax deduction may be passed on a simple majority vote once the bill becomes law.

The Committee decided not to include public sector pension reform in the debate over the gross receipts tax and public education improvements. This puts Oregon at risk of offsetting the new revenue due to cost increases from the public sector pension system. As Hillary Borrud and Mike Rogoway of The Oregonian framed it, “Unless lawmakers find some way to insulate schools from the state’s pension crisis, soaring pension obligations will gobble up a quarter of the tax money once it does arrive—and more than half of it within a decade.” This would provide the motivation for the legislature to eliminate the Corporate Activity Tax deduction with a simple majority vote, leaving Oregon with a gross receipts tax with a relatively high tax rate.

The gross receipts tax is being considered amid other tax proposals in Oregon, including a proposed carbon tax and paid family and medical leave. Brighter Oregon, a coalition group of Oregon consumers, taxpayers, and businesses, estimates that the legislature is considering about $5.6 billion in new taxes for the upcoming biennium. This broader context makes it important for the legislature to carefully consider the cost of imposing a gross receipts tax at this time, especially if policymakers are tempted to eliminate the deductions for business costs or labor compensation in an effort to raise revenue in the future.

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A 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.

Tax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit, child tax credit, deduction for employer health-care contributions, and tax-advantaged savings plans.

The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.

A 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.

Tax 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.

A tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state/local taxes paid, mortgage interest, and charitable contributions.

A 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.

A carbon tax is levied on the carbon content of fossil fuels. The term can also refer to taxing other types of greenhouse gas emissions, such as methane. A carbon tax puts a price on those emissions to encourage consumers, businesses, and governments to produce less of them.