During the recent brief debate before the legislature pushed through the “Grand Bargain” tax package, I pointed out that the tax subsidy for certain business owners would not create any jobs, save maybe for lawyers and accountants dispensing advice on how to game the system.
And so the games begin.
Barely had the dust settled from the special legislative session when the law firm of Lane Powell PC began suggesting that business owners take advantage of the tax break simply by changing the way their businesses are structured (PDF).
Slideshow: Analysis of Tax Provisions in “Grand Bargain”, September 25, 2013
The deal, you may recall, gives certain owners of S corporations and limited liability companies (LLCs) the choice of lower rates on income “passed through” to the owner and taxed as personal income. The tax subsidy will by-and-large benefit some of Oregon’s wealthiest 1 percent, while draining revenue away from schools, mental health and care for seniors. While this tax subsidy will cost hundreds of millions of dollars, the legislature’s own economists are uncertain just how costly it will be, because it opens the door for gaming the tax system.
And those gaming the tax system will be the corporate lawyers and accountants.
Since business income earned by pass-through entities like S corporations can be taxed at a lower rate under the Grand Bargain scheme, business owners “should consider using an S corporation or forming a tax partnership with another owner,” Lane Powell advises.
“Simply transferring a one percent interest to a spouse or a wholly-owned S corporation may suffice,” Lane Powell posits. Suffice it to say that could add to the projected costs.
And the law’s so-called job requirement? The attorneys and accountants know how to play games with that, too.
To benefit from the option of a lower tax rate, a business must have at least one non-owner employee, and the non-owner employee(s) together must log at least 1,200 hours of work during the tax year. As Lane Powell explains, “This requirement may create a peculiar incentive for spouses who jointly own and operate a business to cause one spouse to be a non-owner employee rather than a joint owner.”
Does that sound like job-creation or a shell game?
We predicted that the Grand Bargain tax scheme would create an incentive for certain business owners to use gimmicks without creating jobs to get the subsidy, and that prediction is coming to pass.
The winners of this Grand Bargain tax game will be those wealthy enough to take advantage of the law’s complexity and their lawyers and accountants, because, as the Lane Powell lawyers caution, gaming the system requires the “advice of a tax professional.”
The losers in the Grand Bargain tax game are, of course, the people of Oregon.
This blog post was originally posted on www.blueoregon.com on October 30, 2013. The original post can be found at http://www.blueoregon.com/2013/10/grand-bargain-tax-games-begin/.