Lowest in the Nation?
Oregon has the lowest business tax burden in the country, according to a new study written by the accounting firm Ernst & Young and published by the Council on State Taxation (COST). COST is a Washington, D.C.-based independent trade association, originally an advisory committee to the Council of State Chambers of Commerce.
Download a copy of this report:
Oregon’s Business Tax Burden: Lowest in the Nation? (PDF), January 23, 2004.
National COST Study (PDF), January 2003.
State by State COST Study (PDF), January 2004.
OCPP’s 2003 report Making Sense of Spending and Taxes in Oregon, (PDF), April 15, 2003.
The COST study examines initial tax incidence and includes all state and local taxes paid by businesses. Oregon ranked lowest among all states (50th) for business taxes as a percent of private sector economic activity and for business taxes as a percent of capital income. Total state and local business taxes as a percent of private sector economic activity were 4.8 percent nationally, but just 3.4 percent in Oregon. Total state and local business taxes as a percent of capital income were 15.6 percent nationally, but just 8.7 percent in Oregon.
On two other measures of tax burden, business taxes per employee and business share of all state and local taxes, Oregon ranked 49th and 48th respectively. State and local business taxes per employee were $3,737 for the average of all states and just $2,618 in Oregon. Oregon businesses pay 35 percent of all state and local taxes, compared to U.S. average of nearly 43 percent.
The Report’s Major Shortcomings
|Oregon’s ranking among all 50 states for business tax burden
Finding from the COST study FY 2003
|Business taxes per $ of private sector economic activity
|Business taxes per $ of capital income
|Business taxes per employee
|Business share of all state and local taxes
|Source: Total State and Local Business Taxes: A 50-State Study of the Taxes Paid by Businesses in FY 2003
The COST study contains some major flaws. As a result, it may not be a good measure of the State’s tax “competitiveness.” Instead, it may only be a good measure of the mix of industries, the degree of capital intensity of the businesses in the state, and other economic factors.
The COST study makes highly questionable choices regarding which taxes are considered “business” taxes, including a broad range of taxes that most economists agree are not fully borne by owners of capital, such as unemployment insurance and property taxes on rental property. COST also classifies property taxes paid by businesses such as farmers on their personal, owner-occupied homes and telecommunications taxes that are directly billed to consumers, as “business” taxes. In addition, COST considers all non-profit organizations as “businesses,” thus adding their taxes to the business tax burden. By including so many taxes that are not actually paid by businesses, the COST study represents a seriously inflated measure of the initial incidence of business taxes.
The COST study pays considerable attention to increases in the business share of taxes over the last two years, but ignores the long-term downward shift in the business share of taxes, which is documented in other COST studies. A comparison of this recent COST study with a previous COST analysis shows that, nationwide, businesses paid 42.6 percent of total state and local taxes in FY 2003, down from 46.5 percent in 1980. The recent increase in business tax burden nationally is likely the result of the extent to which businesses pay property taxes that generally did not decline in the recession that began in 2001.
Finally, readers of the COST study should be careful not to equate a state’s tax burden with its “business climate.” As the study acknowledges in the text, a state’s overall business tax burden is influenced not just by tax policy, but by the mix of industries located in a state, as well. The level and quality of public services and infrastructure are also key components of a state’s “business climate.”
Implications for public policy debate
The COST study is based on an inflated measure of business tax burden, but its conclusion that Oregon’s tax burden is low is consistent with other studies that do not share the flaws of the COST study. Studies by the Pennsylvania Economy League and the Utah State Tax Commission confirm Oregon’s low business tax burden. As voters decide a variety of changes to Oregon’s tax system, including temporary and permanent changes to taxes paid by businesses, and the Legislature’s Joint Tax Reform Committee develops recommendations for a planned June special session, they should consider this and other studies showing Oregon’s business taxes are among the lowest in the nation.