By Benjamin Humphreys, CPA September 27, 2016
As the political season is heating up, some measures are going to hit Oregon’s ballot that affect our local tax laws. Being a connoisseur of tax literature, naturally I revel diving into the minutia of measures and initiatives our politicians can come up with. I am going to preface the following that all projected data is simply that, projections, or best guesses. There was a Research Report issued by the Oregon Legislative Revenue Office in May 2016 labelled #3-16 for then Initiative petition 28, which has since evolved into Measure 97 where many of the figures in this article rely upon. These Research Reports are meant to be independent in nature.
The Facts
The certified ballot title and summary are as follows:
| “ | Increases corporate minimum tax when sales exceed $25 million; funds education, healthcare, senior services
Result of ‘Yes’ Vote: ‘Yes’ vote increases corporate minimum tax when sales exceed $25 million; removes tax limit; exempts “benefit companies;” increased revenue funds education, healthcare, senior services. Result of ‘No’ Vote: ‘No’ vote retains existing corporate minimum tax rates based on Oregon sales; tax limited to $100,000; revenue not dedicated to education, healthcare, senior services. Summary: Current law requires each corporation or affiliated group of corporations filing a federal tax return to pay annual minimum tax; amount of tax is determined by tax bracket corresponding to amount of corporation’s Oregon sales; corporations with sales 100 million or more pay $100,000. Measure increases annual minimum tax on corporations with Oregon sales of more than $25 million; imposes minimum tax of $30,001 plus 2.5% of amount of sales above $25 million; eliminates tax cap; benefit companies (business entities that create public benefit) taxed under current law. Applies to tax years beginning on/after January 1, 2017. Revenue from tax increase goes to: public education (early childhood through grade 12); healthcare; services for senior citizens. |
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Translation
C corporations are a specific type of business entity which usually, but not always, applies to larger companies, such as Nike, Walmart, Fred Meyer and other national corporations. Based on past information from 2013 tax return data, there were 29,475 C corporations filed in Oregon. Of these Oregon C Corporations, only 1,051 would actually see a difference in their tax bill as a result of the passing of Measure 97. This means that less than 4% of all C corporations in Oregon would collectively pay about $3 billion dollars more in tax per year. It is projected that Wholesale Trade and Retail Trade industries would account for 45.2% of the increased tax burden.
Wholesale Trade – goods are purchased and stored in large quantities and sold, in batches of a designated quantity, to re-sellers, professional users or groups, but not to final consumers.
Retail Trade – the re-sale of new and/or used goods to the general public, for personal or household consumption or use.
Since the majority of the large C corporations in the retail industry operate on close margins of profit, a tax on gross sales would most likely mean an adjustment in cost to the consumer. Grocery stores, clothing stores, hardware stores, and gas stations would have to pass this cost on to the consumer to stay in business. This would create an estimated $600 per person increase in costs to the population of Oregon residents. This additional tax is also projected to limit hiring over the next 5 years for an estimated 20,000 jobs according to the Oregon Legislative Revenue Office research report.
Why is this Bill Needed? What problem does this fix?
Two major increased costs are facing the State of Oregon in the near future. First, we are facing an ever increasing projected PERS liability. Based on the published Unfunded Accrued Liability for PERS as of December 31, 2014, there was over $3 billion dollars of liability on the books at that time. The PERS Tier 1 and Tier 2 guaranteed return on investments are going to continue to haunt the future budgets and will only go away when retirees do. Second, the federal government subsidy amounts currently paying 95% of the Cover Oregon costs to meet the Obama Care provisions of health care will be expiring at the end of next year. The Oregon Health Authority has requested an additional $1 billion increase from the General Fund in the 2017-2019 budget proposals. The projected increased tax generated from Measure 97 helps to cover the increased liabilities over the next budget cycle.
In short, Oregon needs money to cover existing services and liabilities.
Why You Want to Vote Yes – Realizing there is a budget shortfall for current services, including honoring the payments guaranteed to retirees and providing basic insurance through Cover Oregon, you are comfortable increasing the tax collections on corporations with sales over $25 million in gross sales. You should also be comfortable shouldering some of the cost of this tax in increased consumer product prices.
Why You Want to Vote No – There could be a few reasons for voting no on this measure, all of which will create a scramble for the upcoming 2017-2019 Oregon budget. Perhaps you are against one or many of the increased cost of programs and wish to limit local services to cover the shortfall. Or perhaps you are against this type of tax and would prefer to see a more balanced tax that applies to all businesses rather than singling out large C corporations. Or perhaps you are against the implications of raising mandatory living costs to low and medium wage earners.
Writer’s Opinion:
Measure 97 is a solution to an increasing budget need. I don’t like the idea of not honoring our retirees or leaving an insurance program underfunded. Additionally, I don’t like creating a regressive tax that impacts our mid to low wage earners by increasing mandatory expenses for their families. Everyone has to eat. Also, C corporations are one of many types of business entities and this Measure would create a disadvantage for C Corporation business only while rewarding other types of business entities.
There currently is a budget issue; however, I would prefer to see our local government officials present an alternative means to acquire the funds or seriously consider reducing costs.
If you would like more information or want to discuss any tax or accounting related topics, please contact Benjamin Humphreys.
Please realize the opinions in this article do not represent Brenner & Company, LLP nor should they be taken as a representation of any official position from said company. This article is merely a means to promote healthy debate on a topic of the day.
Benjamin Humphreys, CPA
“Industry, perseverance, and frugality make fortune yield.” – Benjamin Franklin
Benjamin Humphreys, CPA 