Seeking to close a $1.8 billion deficit, the Oregon Senate is considering yet another gross receipts tax that would likely cause higher consumer prices and job losses in the state. Tax Foundation Economist Nicole Kaeding explains the new proposal, how it differs from the defeated Measure 97 and why the negative economic impacts would be similar.
“The tax pyramiding has consequences for Oregonians, through higher prices or fewer job opportunities,” Kaeding says. “Oregon legislators continue to flirt with a gross receipts tax, a flawed, outdated type of taxation. In the state’s quest for more revenue, legislators should explore other options.”
Gross receipts tax proposals often point to the commercial activities tax (CAT) in Ohio as a success story. However, Kaeding points out that the Ohio CAT has created extremely high effective tax rates for low-margin businesses.
“The Oregon legislature began its session on February 1 and is already on its way to trying to find ways to close its $1.8 billion deficit. Some are small, such as the proposed excise tax on coffee. Others are larger, like the new gross receipts tax, proposed by the Oregon Senate yesterday.
Under the proposal, Oregon would create a new “business privilege tax,” in the form of a gross receipts tax. The tax would be 0.7 percent on all sales in excess of $5 million. Filers with sales of less than $5 million would pay a flat $250 year, and those below $150,000 would be exempt from even filing a return.
The gross receipts tax would apply to all businesses, regardless of their legal structure, meaning that pass-through business, which generally file under the individual income tax, would also be subject to this tax. The proposal does not repeal the state’s corporate income tax, but instead is in addition to the tax.
Uniquely, this proposal takes the form of a constitutional amendment, not a piece of legislation. The special election would occur May 16, 2017. Oregon has an origination clause in its state constitution, so proposing this as an amendment could be a way for the Senate to start conversations on a gross receipts tax, without violating constitutional restrictions.
Oregon continues to explore creating a new gross receipts tax on its quest for more revenue and greater revenue stability. Measure 97 failed in November, and this is now the third additional gross receipts tax proposal in Oregon since Measure 97’s defeat.
Proponents of a gross receipts tax in Oregon continue to hold up Ohio and its commercial activities tax (CAT) as an example of a state with a commercial activities tax that is successful. Just this morning, my colleague, Jared Walczak, wrote about the challenges posed by the CAT. (West Virginia is also considering a similar proposal.)
Under the Ohio CAT, a firm with a profit margin of 1 percent faces a 26 percent effective tax rate on corporate net income, which is notable given that some industries do run on average profit margins of just a few percent, and of course some companies experience actual losses. An Ernst & Young (now EY) study applied average profit ratios for major industries to estimate effective tax rates under the CAT, and found rates ranging from 0.4 percent (management of companies) to 8.6 percent (construction), with a weighted average of 4.7 percent on a 0.26 percent gross receipt tax, just slightly higher than what has been proposed in West Virginia. Other industries with above-average tax rates under the Ohio CAT include wholesale (8.3 percent), retail (7.9 percent), and transportation and warehousing (7.0 percent), all low-margin enterprises.
In many ways, gross receipts taxes are a throwback to an earlier era. Once common due to their ease of administration, these taxes were largely abandoned over the course of the 20th century as states sought to modernize their tax codes and jettison their least competitive components. More recently, however, with corporate income tax revenues declining sharply, gross receipts taxes have seen a resurgence, adopted in Ohio, Nevada, and Texas, and currently under consideration in the Oregon legislature following the defeat of a high-rate gross receipts tax on the state ballot last November.
The tax pyramiding has consequences for Oregonians, through higher prices or fewer job opportunities. (While this proposal is not directly comparable to the empirics of Measure 97, the direction of results would be similar.)
Oregon legislators continue to flirt with a gross receipts tax, a flawed, outdated type of taxation. In the state’s quest for more revenue, legislators should explore other options.”
