First Draft of Commercial Activities Tax Published

LC 3549 is Intended to Replace Business Income Taxes

The Joint Committee on Tax Reform unveiled the first draft of a business tax system to replace the current set of state corporate and business taxes. The 111-page concept will be under intense discussion in the coming weeks.

The Commercial Activities Tax (CAT) is unlike any tax Oregon has considered. Patterned after Ohio’s system and the Washington Business & Occupation Tax, the CAT – as it looks now – would apply to all business entities; have a filing threshold of $150,000 in annual Oregon sales; impose a flat $250 fee for businesses with annual Oregon sales of less than $3 million; and have varied rates depending on the business sector the entity is in (i.e., 0.85 percent for services, 0.35 percent for retail trade, 0.25 percent for wholesale/warehousing, and 0.48% for all others). The lower rates applied to high volume/low profit margin sectors is a means to deal with “pyramiding”, the accumulation of taxes onto a product as it passes through a chain of commerce. To mitigate the potential for higher prices to the consumer, the concept includes a one-half percent reduction in the two lower personal income tax brackets to 4.5 percent and 6.5 percent. LC 3549 eliminates the corporate income tax. Providing some transition time, the bulk of these¬†provisions take effect in 2018.

The Legislative Revenue Office estimates a net revenue impact to the state of $954 million in 2017-2018, $1.228 billion in 2019-21, and $1.42 billion in 2021-23.

A group of legislators led by the Speaker of the House is advocating for a CAT tax rate of 0.95 percent on businesses with annual Oregon sales above $5 million, with the goal of producing over $3 billion a biennium.

The CAT concept has critics – pyramiding, the magnitude of the change to the business tax system – but it has been demonstrated to be far more stable than the corporate income tax, is easier to comply with, and with its much broader base can raise significant revenue with very low rates.

The biggest hurdle for the CAT is the argument that it is a gross receipts tax and that the voters soundly defeated the last gross receipts tax (Measure 97) last November. But there are significant differences between this CAT concept and Measure 97. Instead of eliminating the corporate income tax, Measure 97 was built on top of the existing system. Measure 97 did not reduce personal income tax rates. Measure 97 would have taxed a very narrow set of business at a rate of 2.5 percent. Measure 97 was not limited to Oregon sales, but taxed all sales of a company.

The common school of thought in the Capitol is that the CAT is too significant of a change to make this session.

There is no question that the legislature has its work cut out to deal with the highly complex transportation funding package and a new business tax system in the next six weeks.

Contributed by: Gil Riddell | AOC Policy Director