Window Dressing or Real Reform?

August 1, 2008By Michael Leachman

It is by now old news in Oregon that corporations are not paying their fair share of our income taxes. People know that two out of three corporations get away with paying our outdated $10 a year corporate minimum tax. Oregonians know there’s a corporate loophole lobby.

Here are the latest facts: in the next budget cycle, corporations will pay as a share of the economy less than half of the income taxes they paid 30 years ago. Why? Largely because the loophole lobby created a tax system that lets corporations escape taxation on profits.

Here’s another measurement of the problem: in the mid-1970s, corporations paid over 18 percent of our income taxes; in the next budget cycle, they will pay just 5 percent. Some – maybe one-third to one-half – of the decline is because the loophole lobby successfully changed the law to allow more corporations to pay personal income taxes instead of corporate taxes, which reduced federal taxes for those corporations making the switch and cut the amount of corporate income taxes Oregon receives. The decline is also because the loophole lobby has not only frozen Oregon’s corporate minimum tax at $10 since 1931, but over the last 20 years they’ve created loopholes that allow profitable corporations to avoid paying their fair share of taxes.

Who’s picking up the slack?

Individual Oregon families and small businesses. Somebody had to.

Are our leaders in Salem planning to do anything about this?

Governor Kulongoski and the House and Senate Democrats have proposed increasing the $10 corporate minimum tax. None of them have published details, but if their proposal mirrors an earlier one it would re-set the minimum to no more than $5,000, which would increase corporate income taxes by about $90 million for a two-year budget period. Under the Governor’s plan, all of the money would go into Oregon’s grossly underfunded Rainy Day Fund.

Raising $90 million would only modestly alter the imbalance between what corporations pay today and what they used to pay. Corporations would still be paying less than half what they paid 30 years ago as a share of the economy.

If a $90 million proposal is not enough, then what is? How much should profitable corporations operating in Oregon pay to support the public structures that make Oregon a great place to conduct business, work, play, and raise a family?

Since corporations pay tax on their profits to both Oregon and the federal government, comparing Oregon’s ability to tax profits with the federal government’s performance can act as a barometer of how well Oregon is doing.

This approach is conservative because it ignores the fact that corporations are avoiding federal taxes on a significant amount of profits. A recent U.S. Government Accountability Office report found that about two out of three corporations pay no federal income taxes, demonstrating that the federal tax effort is not a high standard. Still, looking at federal payments as a share of the economy sets a bar, even if the bar is not as high as it should be.

Oregon represents 1.2 percent of the total national economy, as measured by gross domestic product. Hence, it is reasonable to assume that the tax base for Oregon’s corporate profits tax is about 1.2 percent of the national corporate tax base.

Since the national corporate profits tax base was about $2.1 trillion in 2006 and 2007 combined, Oregon’s share was about $24 billion.

If corporations had paid Oregon income taxes on $24 billion in profits in 2006 and 2007, they would have paid $754 million more than they actually did over those two years.

Why did corporations pay $754 million less than Oregon’s share of the federal income tax base? In part because the loophole lobby has secured a plethora of tax breaks for corporations. If our system weren’t so full of loopholes, we’d at least match up better with what the feds collect (and they aren’t exactly doing a gangbuster job!).

If corporations should be paying somewhere around $754 million more, will the next legislature go with a meager $90 million plan or will they enact more productive reform? Will we get just window dressing or long overdue, meaningful reform?

Michael Leachman is a policy analyst at the Oregon Center for Public Policy, which does in-depth research and analysis on budget, tax, and economic issues with the goal to improve decision making and generate more opportunities for all Oregonians.