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October 2016

Answers to your questions on Measure 97

by Chuck Sheketoff

[Second update on October 24, 2016. Four FAQs added at the end.]

We’ve been getting lots of questions from folks about Measure 97 at presentations and by phone and email, and rightly so. When enacted by voters, Measure 97 will usher in big changes in our state — changes for the good.

Here are the questions we’ve been getting most often and the answers:

Why is Measure 97 good for Oregon’s business climate?

Why is the location of a corporation irrelevant under Measure 97?

Why is Measure 97 not a sales tax?

Why will Measure 97 not be passed on to consumers?

Why is Measure 97 a gross receipts tax rather than a tax on profits?

How does the measure provide assurance about where funds will be spent?

Under what conditions should the legislature tweak Measure 97?

Why are the software industry's complaints about Measure 97 misplaced?

What are “C-corporations” and why are they the only ones subject to this tax?

What is the history of Oregon’s corporate minimum tax?

Why will Oregon’s population, jobs, personal income and wages grow under Measure 97 at the same rate as without the measure?

Didn’t the legislature exempt certain sales by agricultural cooperatives from the corporate minimum tax?

Why do S-corporations and other pass-through entities still pay just $150 a year under Measure 97?

Will Measure 97 cost the typical household $600?

Will all C-corporations with sales in excess of $25 million pay this tax?

Will Measure 97 add stability to our tax and budget system?

Will the corporations subject to Measure 97 be able to deduct some of the tax increase in their federal tax returns?


Why is Measure 97 good for Oregon’s business climate?

Investing in education will strengthen Oregon’s business climate over the long haul more than anything else a state government can do. Indeed, the Oregon Business Plan, developed by Oregon’s largest business groups, states that education is “at the top of the priority list as a fundamental ingredient for economic prosperity.” Measure 97 will allow Oregon to confront the chronic under funding of our public schools and consequent under-performance — low graduation rates, large class sizes, too few course offerings, too few librarians, etc. By boosting the quality of education in Oregon, Measure 97 will strengthen Oregon’s economy and business climate.

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Why is the location of a corporation irrelevant under Measure 97?

Measure 97 has nothing to do with where a corporation is located. The issue is whether it has sales in Oregon and is subject to Oregon’s corporate income tax. Regardless of where the business is based, a company will be subject to Measure 97 if it is a C-corporation and it sells products or services in Oregon in excess of $25 million per year and has more than just sales people in Oregon. Put another way, if it is just selling in Oregon with no more than sales people (no buildings, equipment, etc.), it is not subject to Oregon’s income tax. If a corporation threatens that it will pull out of Oregon if voters approve Measure 97, that means it doesn't want to sell here anymore. That makes no sense.

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Why is Measure 97 not a sales tax?

Measure 97 is simply a change to Oregon’s current corporate minimum tax, which is based on receipts by corporations, not sales to customers. Corporations subject to Measure 97 will pay it on their tax returns after they have added up all their Oregon sales during the year. If they include the Measure 97 tax in the price of their goods or services, they will pay higher taxes. A sales tax, on the other hand, is tacked on to the sales price to the consumer and does not impact corporate profits or the corporation’s tax liability.

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Why will Measure 97 not be passed on to consumers?

If corporations could pass the cost along to customers, they would not oppose the measure. Companies do not set prices based on how much they pay in state taxes, which are a very small part of the cost of doing business. If they did, Oregon would have the lowest prices in the country, since we have the nation’s lowest business taxes. But our prices are not lowest in the country. Plus, the relatively few large C-corporations impacted by Measure 97 will face competition from businesses (including online retailers and their own online operations) not subject to the tax, forcing companies to absorb the cost to stay competitive. Those corporations who do add the tax to their prices will pay more taxes.

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Why is Measure 97 a gross receipts tax rather than a tax on profits?

Corporations use accounting tricks and advantageous tax rules to report few profits (sometimes nothing) to tax authorities, while reporting much higher profits to shareholders. That’s why Oregon’s existing tax on profits often fails to compel corporations to pay their share. Moreover, corporations are allowed to use tax credits against the profits tax to lower their tax liability, even to zero. In addition, as the 2009 legislature weighed options for updating the longstanding $10 corporate minimum tax, the Oregon Business Association (OBA) stepped forward with a plan for a sliding scale tax based on sales, not profits, just for C-corporations.

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How does the measure provide assurance about where funds will be spent?

The measure reads: “All of the revenue generated from the increase in the tax created by this 2016 Act shall be used to provide additional funding for: public early childhood and kindergarten through twelfth grade education; healthcare; and, services for senior citizens.” Those asking for more specificity or to bind future legislatures are asking for the impossible and for something they could not deliver themselves. Enactment of Measure 97 would make clear the will of the voters: put the money toward education, healthcare and senior services. There is no reason to worry that lawmakers will do otherwise, because the bulk of the state budget already goes to education, healthcare and senior services.

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Under what conditions should the legislature tweak Measure 97?

If voters approve Measure 97, you can be sure that corporations will line up at the State Capitol to ask for changes to the law — tax cuts. Before the legislature creates new tax loopholes to “fix” concerns about Measure 97, the corporations seeking the tax cuts should be required to prove that the new tax is a problem for them by making public their state and federal tax returns along with the financial records provided to shareholders. History teaches us that all too often corporations have asked for tax cuts they don’t need and the legislature has granted them. Only by making corporate tax and financial records public can the legislature and voters know whether the legislature should be giving corporations new tax cuts in response to Measure 97.

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Why are the software industry's complaints about Measure 97 misplaced?

In 2012, the Legislative Revenue Office published a report titled Taxation and Oregon's Interstate Competitiveness. That report, written with an advisory group from the Oregon Business Association, flagged that the way Oregon apportions sales under our current law puts the software industry and other services at a disadvantage, and recommended that the legislature consider changing to what is called a "market based approach" to apportionment. The 2013, 2014 and 2015 legislatures did nothing to make the change. But in 2016, as the initiative that became Measure 97 loomed on the horizon, an amendment was drafted and proposed to make the change. To the surprise of some, both the Oregon Business Council and the Oregon Business Association urged the 2016 legislature not to fix the problem. Thus, the problem rests with existing law and the political motivations of those two business lobby groups, not Measure 97. And the legislature knows how to fix the problem.

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What are “C-corporations” and why are they the only ones subject to this tax?

C-corporations are corporations with profits subject to the federal corporate income tax. Other entities, such as S-corporations, LLCs, and the like, have their profits passed through to their owners and taxed as part of the owners’ personal income taxes. The reason Measure 97 only impacts certain C-corporations (those with Oregon sales in excess of $25 million a year) is because the measure is merely amending the current law approved by voters in 2010 by increasing the tax on those C-corps with the most sales. That law established a minimum tax based on sales just for C-corporations as suggested by the Oregon Business Association to the legislature in 2009.

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What is the history of Oregon’s corporate minimum tax?

In 1929 the Oregon legislature established Oregon’s corporate income tax and set a $25 minimum tax “for the privilege of carrying on or doing business” in the state. In 1931, the legislature lowered the minimum tax to $10. By 2009, two-thirds of C-corporations paid just $10 a year. That fact became a political liability for the business community — especially as the state faced a serious budget crunch as a result of the Great Recession. As the legislature weighed options for raising revenue to prevent deeper budget cuts, the Oregon Business Association (OBA) stepped forward with a plan for a flat tax for all businesses, regardless of profits or corporate structure and a sliding scale tax based on sales, not profits, just for C-corporations. The legislature took OBA’s plan and tweaked it, lowering the base rate and increasing the tax for C-corporations with the most sales. Voters approved this new corporate minimum tax structure when they enacted Measure 67 in 2010. The minimum tax ranges from 0.15 percent for corporations with $10 million in sales, to less than 0.01 percent for the corporations with the most sales. Measure 97 keeps the current corporate minimum tax for sales up to $25 million while changing the rate for the corporations at the top: a 2.5 percent on sales in excess of $25 million.

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Why will Oregon’s population, jobs, personal income and wages grow under Measure 97 at the same rate as without the measure?

A report by the Legislative Revenue Office (LRO) projects the same level of growth in population, personal income, wages and employment with or without Measure 97. All of these indicators grow at the same rate, according to the report; there is no statistically significant difference in the economic estimates between the two scenarios. While LRO and critics of Measure 97 point to small differences in the economic projections under the measure, each of the five-year projections differs by less than 1 percent, well within the margin of error — making it wrong to describe the estimates as different. Moreover, while LRO pointed out that improved spending on education and other public structures as a result of Measure 97 can strengthen the economy, LRO did not factor those economy-boosting impacts into its analysis.

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Didn’t the legislature exempt certain sales by agricultural cooperatives from the corporate minimum tax?

In 2010, the legislature passed HB 3058. That bill, as explained by the Legislative Revenue Office, “removed sales representing business done with or for members of the co-op from the definition of Oregon sales when agricultural co-operatives calculate their minimum tax.” Measure 97 does not change the special treatment afforded to agricultural co-ops. The exemption does not exempt sales to those who are not members of the cooperative, such as at a cooperative’s gas stations or farm/hardware stores that are part of a C-corporation.

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Why do S-corporations and other pass-through entities still pay just $150 a year under Measure 97?

Because current law, as suggested by the Oregon Business Association, treats S-corporations and other pass-through entities differently than C-corporations, and Measure 97 only modifies current law for C-corporations with sales of $25 million or more. Measure 97 does not change the current flat tax of $150 paid by S-corporations, Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs) — even if these companies have more than $25 million in sales in a year.

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Will Measure 97 cost the typical household $600?

No. Have you heard the computer programming adage “garbage in, garbage out?” The computer model that generated that oft-cited cost figure was programmed with false and unproven assumptions. The tax plan modeled by the Legislative Revenue Office was an across-the-board gross receipts tax — a tax on all Oregon businesses — not the much more narrow tax under Measure 97, which would only tax C-corporations with Oregon sales in excess of $25 million. The computer model assumed that a significant portion of across-the-board gross receipt taxes are passed on to consumers and applied that assumption to Measure 97, despite the measure being a one-of-a-kind tax affecting only relatively few corporations. The model also failed to take into account that large corporations utilize national and regional pricing structures, and that the corporations subject to Measure 97 face competition from the many Oregon businesses not affected by the tax, including online retailers and their own online operations.

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Will all C-corporations with sales in excess of $25 million pay this tax?

No. Remember, Measure 97 is an amendment to Oregon’s existing alternative minimum tax. Some profitable C-corporations will continue to pay under Oregon’s profits tax because their tax liability, less any tax credits they use, will still be higher under the profits tax than the minimum tax calculated under Measure 97.

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Will Measure 97 add stability to our tax and budget system?

Yes. The Legislative Revenue Office has noted that this tax will add a degree of stability to our tax system and will likely make our corporate tax system less volatile. Moreover, Measure 97 provides the funds necessary to add stability to our budgeting system. As Oregon’s budget grows under Measure 97, Oregon will need a bigger rainy day fund to provide budget stability during economic downturns. Measure 97 provides an opportunity for the legislature to be fiscally responsible and stock Oregon’s rainy day fund with enough money to avoid cuts to education, health and senior services during the next economic downturn.

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Will the corporations subject to Measure 97 be able to deduct some of the tax increase in their federal tax returns?

Yes. Corporations can deduct their state income taxes on their federal income tax returns, so those corporations subject to Measure 97 will be able to offset some of the tax increase by deducting it on their federal income tax returns. Thus, the federal government will, in effect, pick up some of the cost of the tax increase. The Legislative Revenue Office assumes that the federal offset will export about 22 percent of the total cost of Measure 97 to the federal government.

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This post was originally published on www.blueoregon.com on October 11, 2016. The original post can be found at http://www.blueoregon.com/2016/10/answers-your-questions-measure-97/.

 

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