A version of this article appeared in The Register-Guard on February 24, 2016.
An initiative petition from A Better Oregon would increase the corporate minimum tax for businesses with annual Oregon sales exceeding $25 million, impacting Oregon’s economy and residents if passed.
Currently, Oregon has the country’s highest minimum tax, capped at $100,000. Initiative Petition 28 (IP28) would lift this cap and impose a 2.5 percent tax on Oregon sales over $25 million. The increase is imposed in addition to the corporation income tax.
The revenue generated from this tax increase is slated to provide additional funding for public education (early childhood and kindergarten through 12th grade), health care, and services for senior citizens. There’s no guarantee the funds will actually go toward these causes, because the money is deposited into the general fund and isn’t specifically earmarked for their use. Initial estimates from the Legislative Revenue Office predict this could result in $5 billion in additional funding every two years.
To appear on the ballot, the IP28 petitioners must collect sufficient signatures by July 8, 2016, and the secretary of state must verify the initiative by July 31, 2016. Election Day is November 8, 2016.
Here’s what you need to know about IP28:
On Top of Existing Corporate Income Tax
The proposed tax is based on sales, not net income, of certain companies with annual sales exceeding $25 million, plus $30,001. For example, a corporation with $50 million in Oregon sales, no matter its profit, would pay $655,001. Under current law, the same corporation would pay a minimum tax of $50,000 unless that amount is higher under the corporate net income tax.
No Consideration of Profit Margins
In contrast to a corporate net income tax, this increase would be due regardless of the profit margin (revenue less expenses) at which a company operates. The grocery industry, for example, earned an average profit margin of 1.5 percent in 2014. Industries that operate at profit margins under 2.5 percent would be particularly hard hit.
Price of Consumer Goods May Increase
Unlike a sales tax, which is visibly assessed once, the minimum tax would apply at every step and becomes embedded in the purchase price. Additionally, sales taxes generally allow for exemptions for basic life necessities such as food, prescription medicine, and housing rents. Under the proposed gross receipts tax regime:
- A wholesaler would owe 2.5 percent on each sale
- Its retailer customer would also owe 2.5 percent on its sales to consumers
- If there’s a manufacturer, it would add another 2.5 percent, so this embedded tax could add up to 7.5 percent or more paid by the ultimate consumer
This concept of pyramiding is a common criticism of gross receipts taxes. It effectively operates as a sales tax, which has been rejected nine times by Oregon voters.
Most gross receipts tax rates around the country are relatively low when compared with IP28’s 2.5 percent rate. In Washington, it ranges from 0.138 percent to 1.5 percent and it settles at 0.26 percent in Ohio. If passed, the tax burden of operating in Oregon would increase dramatically when compared with other states.
IP28 proposes to tax only C corporations. Partnerships, S corporations, B corporations, and limited liability companies would be exempt. This creates a potential loophole that could be utilized by simply changing your business form.
Potential Job Losses
Organizations that purchase products and services from C corporations would need to increase their price for items resold to Oregon consumers. In response to this, businesses purchasing goods in Oregon may opt to leave the state or relocate some or all of their facilities to avoid the increased cost of doing business in the state. The Legislative Revenue Office, in evaluating similar proposals to IP28, has forecast job losses should a gross receipt tax pass.
Altered Business Environment
Inevitably, IP28 would extend beyond C corporations, impacting all businesses and consumers.
This includes not-for-profits, pass-through entities, and hospitals, all of which may be forced to increase costs; or worse, they may need to reduce funding or terminate certain programs for Oregonians most in need. Furthermore, every Oregonian including the state and its municipal bodies would undoubtedly see an increase in the cost of everyday items, such as utilities, food, medicine, clothing, and transportation, just to name a few.
Each tax can have a place in a well-planned system. Come November, Oregon voters will need to determine whether IP28 fits the bill.
We're Here to Help
For more information about IP28 or taxation in Oregon and other states, or for help determining what the implications are for your business, contact your Moss Adams professional or e-mail email@example.com.