Oregon’s New CAT Tax — The Wrong Solution, Poorly Implemented at the Worst Possible Time

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Oregon’s new Corporate Activity Tax (CAT) was ill-conceived, has been poorly implemented and couldn’t come at a worse time because of the economic crisis hitting local businesses by the COVID-19 pandemic, according to Central Oregon business leaders.

“It’s a pretty bitter pill (for local businesses) to swallow,” said Katy Brooks, CEO of the Bend Chamber of Commerce. “It’s difficult to figure out what your taxable revenue would be in a good year, but nearly impossible this year” with COVID-19 causing so much uncertainty.

The CAT (HB 3427 — or Student Success Act) — was passed by the Oregon Legislature in May of 2019. It became effective on January 1, 2020, and its first quarterly payments from entities estimating their annual tax liability of greater than $10,000 were due no later than April 30. Those underestimating their CAT tax and paying more than three months late could be fined up to 25 percent of the tax owed.

It is not a strictly “business” tax because the burden imposed falls not only on C and S corporations and LLCs, but also on sole proprietors, partnerships and even trusts and estates. The tax burden is expected to affect nine percent, or 40,000 of the 460,000 subject organizations in Oregon.

The CAT levies a $250 base and .57 percent of certain business revenue on taxable entities billing more than $1 million in annual income. Those billing more than $750,000 a year must register with the Department of Revenue.

“Certain business revenue” is not well defined, and there are 43 identified exclusions in the law — including sales outside of the state, sales of motor fuels, motor vehicle dealer “trades,” Medicare and Medicaid payments to assisted living facilities, interest income and dividends.

Entities exempted from the CAT include hospitals, nursing homes, health insurance companies, certain nonprofits and governmental agencies. But the most notable exclusion is retail and wholesale grocery sales.

To further complicate the calculation of the tax, gross revenue for the tax base is reduced by the lower of 35 percent of the cost of goods sold, or 35 percent of gross wages. Neither option is well defined in the temporary administrative rules still in place governing the law’s implementation. (It is unknown when the final administrative rules will be adopted.)

“It’s super frustrating for the business community” said Roger Lee, CEO of EDCO. “What are business owners supposed to do and remain compliant? It’s unconscionable to have a huge increase in taxes, and the final rules are not written yet.”

Brooks and Lee agreed that the Department of Revenue has done the best it could with the almost impossible orders presented by the legislature.

The controversial bill was pushed through the Democrat-controlled legislature along strict party lines, triggering a four-day Republican boycott of the legislative session. A deal was struck when Democrats agreed to kill proposed gun control regulations for the year in exchange for the end of Republican resistance to the CAT, according to concurrent reports in The Oregonian.

The CAT was the Democrats’ signature accomplishment of the 2019 session and was designed to infuse $1 billion a year into Oregon’s struggling K-12 education system.

According to a December 5, 2017, report in the East Oregonian, Oregon ranked 49th in the country for high school graduation rates, had one of the shortest school years, one of the highest ratios of students-to-teachers and one of the highest rates of chronic absenteeism — all while requiring more credits to graduate than any state except New Jersey.

Earlier in 2019, the Oregon Senate approved $9 billion — a ten percent boost — in K-12 funding over the next two years to cover the period before schools are to receive the first CAT proceeds. Approval of this funding measure was surprisingly bi-partisan, passing 55-4 in the House and 26-2 in the Senate.

“The Chamber completely supports K-12 education. These (students) are not only our kids, they are our future work force,” said the Bend Chamber’s Brooks.

“Oregon’s fastest-growing school districts are in Central Oregon,” EDCO’s Lee said. “While we have five percent of the state’s population, we account for 19 percent of Oregon’s student population growth.” CAT funds would help local school districts meet their K-12 funding needs, but, “There are so many better solutions to our tax structure problems,” Lee said, adding that we are too reliant on state income taxes.

The COVID-19 economic crisis is expected to result in a $3 billion revenue shortfall for the state, according to Gov. Kate Brown. State agencies are already being asked to prepare for a 17 percent reduction in authorized expenditures.

Given the colossal and unexpected new pressure on state finances, Lee said it would come as no surprise to see the CAT taxes appropriated for other General Fund uses instead of K-12 education. Such “flexibility” is written into the statute, he said, citing the Oregon Lottery legislation as an example of how the house and senate can divert funds from intended beneficiaries.

“The (Lottery) referendum was approved for 100 percent to go to community development,” Lee said. “But over the years 70 percent was eventually used to support K-12 schools.”

“It’s similar with the CAT,” he continued. “The bill leaves the door open for other uses.

“It will be interesting to see what happens, with the precipitous decline in personal income tax (due to the economic crisis). How is the state going to get revenue? It’s going to be a rough road. The more productive interaction between the business community and lawmakers, the better the solutions will be to the state’s revenue shortfall.”

(Notes: Three requests for Bend-LaPine School District’s input to this story were not answered. Requests also were made of several local business owners to contribute their views. They declined to go on the record so as not to offend real or potential school district business clients.)

Tom Olsen of Bend is president of Olsen and Associates Business Advisors.

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