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CenterPoints

January 2007

"Single-Sales" - A Modern Robber Baron

by Michael Leachman

When your W-2 form arrives, think of this: Certain multistate corporations are paying much less in corporate income taxes today because Oregon has changed the way multistate firms calculate state income taxes on their profits. That means you pay more than your fair share.

Multistate corporations make profits in more than one state, so there needs to be a way to decide how to allocate their profits for state taxation purposes. States have different rules around this. Most states use a formula that considers the state’s share of a corporation’s total property, payroll, and sales.

Prior to 1991, Oregon used a formula that equally weighted the three factors – property, payroll, and sales. In 1991, Oregon switched to a formula that “double-weighted” the sales factor. The change produced a tax break for companies that had a high share of their property and payroll in Oregon but a small share of their total sales in the state. Companies with sales in Oregon but little property and payroll here saw their taxes increase.

In 2001, Oregon began phasing in a “single-sales factor” formula. Under this formula, only in-state sales relative to all US sales matter in determining how much of a company’s profits are apportioned to and thus taxable by Oregon; it doesn’t matter how much of their property or payroll is based in Oregon. The Legislative Assembly in 2005 cut short the phase-in process and fully phased-in the “single-sales” formula for tax years starting on or after July 1, 2005.

The Oregon Department of Revenue estimates that using the single-sales factor formula instead of the double-weighted sales formula is costing Oregon $77.6 million in the current 2005-07 budget cycle, and will cost another $65.6 million in the upcoming 2007-09 budget cycle. The projected decline in the cost of "single-sales" in the upcoming budget cycle is temporary. It is due primarily to a corporate kicker that will slash corporate tax payments by two-thirds this year. In subsequent budget cycles, the revenue hit from "single-sales" will return to a higher level.

Most of the benefits of the switch to "single-sales" go to large, profitable multistate corporations. In 2001, the Oregon Department of Revenue estimated that if Oregon had gone to "single-sales" in 1998, nearly two-thirds of the tax cut would have gone to 17 corporations with federal taxable income over $1 billion.

Companies with large portions of their property and payroll in Oregon, and few in-state sales relative to all their sales in the US, reaped and continue to reap, large cuts in their corporate income taxes because of the change to a single-sales factor formula. A hypothetical multistate firm with 20 percent of its property and payroll in Oregon, and one percent of its sales (Oregon is just one percent of the national economy), saw its annual taxes fall by more than 90 percent as a result of the formula change.

Take Nike, for example. Nike lobbied for the switch to single-sales factor apportionment and it’s easy to see why. At the Oregon Center for Public Policy, we conservatively estimate (PDF) that Nike's 2006 tax cut from "single-sales" was over $16 million. Other prominent, profitable firms such as Intel also received a massive tax break from "single-sales." When large, profitable businesses reduce their tax obligations, small businesses and individuals get stuck with paying more of the cost of state services.

Keep that in mind as you start the process of filing your taxes. You’re paying more than your share this year because big corporations are paying less under the "single-sales" factor tax cut.

 

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