The Speaker, Ways & Means Co-Chair and House Revenue Committee Chair Offer Proposal for Long-term State Budget Fix

Fits into Framework for Business Tax Reform of Joint Committee on Tax Reform

On May 4th, Speaker of the House Tina Kotek; Representative Nancy Nathanson, co-chair of the Joint Ways & Means Committee; and Chair Phil Barnhart of the House Revenue Committee presented a package of actions to the Joint Committee on Tax Reform for discussion. They stated that the package would provide a long-term fix to the structural shortfall faced by the 2017-19 state budget.

Including current Oregon Health Plan caseloads and the three ballot measures passed in November, 2016 ($357 million for veterans services, continuing technical education, and outdoor school), and notwithstanding continuing accumulated reserves, the three legislators see the budget gap growing to over $2 billion in 2021-23.

They stated a goal of $400 million in cost containment and $250 million in targeted cuts in 2017-19, including future cost-sharing by employees under PERS, avoiding the need for new prison beds before 2025, and managing employment vacancies and new hiring more effectively. Assuming success of cost-containment, the budget gaps fall to $350 million in 2017-19, $1.285 billion in 2019-21, and $1.537 billion in 2021-23.

Arguing against “band-aids” of one-time resources and program cuts, the three legislators stated that the realities of the “current service level” budget is inadequate resources for K-12 (short school year, large class sizes), cost of higher education grows, and rising homelessness; and the uncertainty of the federal budget. Their solution is $2 billion in new revenue for 2017-19 – $1.4 billion education investment; $350 million to pay for the three new ballot measures; and $250 million to invest in essential services.

Using the framework of the Ohio-style Commercial Activities Tax (CAT) under focus of the Joint Tax Reform Committee (see below), the initiative would impose effective January 1, 2018 a CAT of a rate of 0.95 percent on Oregon sales above $5 million, which is estimated to produce $3.024 billion plus $50 million on fuel sales to the Highway Fund. At the same time the initiative would eliminate the corporate income tax ($660 million) and reduce the personal income tax to low- and middle-income households (est. $200 million). The net state general fund impact to the 2017-19 biennium would be plus $2.164 billion. That figure would grow as the initiative remains effective through entire succeeding biennia.

May 4th was only the second meeting of the Joint Committee on Tax Reform. The first meeting was devoted to a briefing on the work product of the smaller tax reform work group, which had been meeting weekly since early in the session, and reported on in Oregon Trails. The Framework for business tax reform presented:

Guiding Principles

  • Broad base and low rates to minimize economic distortions.
  • Destination-based tax to keep export businesses competitive. That is, impose tax at location of sale.
  • Simplify business taxes by repealing complex corporate income tax and replacing with one page corporate activities tax form.
  • Maintain balanced treatment for different business entities by allowing partial credit for pass-throughs (i.e., business entities for which income is passed through to owners/shareholders of the business).

Establish corporate activities tax January 1, 2018

  • Based on gross receipts derived from destination-based sales in Oregon, i.e., sales made in the state.
  • All business entities are subject to the corporate activities tax.
  • Business entities with annual gross receipts less than $150,000 in Oregon are not required to file a corporate activities tax return.
  • Businesses with gross receipts greater than $150,000 but less than $1 million must file a return and pay a $250 flat amount.
  • Businesses with annual Oregon gross receipts greater than $1 million are subject to a corporate activities tax equal to $250 plus ___ percent of gross receipts greater than $1 million.
  • Financial institutions are subject to the corporate activities tax with the definition of gross receipts in Oregon determined by rule.
  • Gross receipts derived from the sale of motor fuel is calculated separately with the revenue placed in the Highway Fund.

Exemptions from the Corporate Activities Tax

  • Government transactions.
  • Donations received by non-profit organizations.
  • Transactions among closely related business entities.
  • Gross receipts of qualified distribution centers.

Credits

  • Pass-through entities are allowed a credit equal to ___ percent of corporate activities taxes paid at the entity level.

Repeal of Corporate income tax starting with 2018 corporate tax year

  • Unused corporate tax credits can be applied to corporate activities tax liability and carried forward up to three years.

Tax Base Description

  • Estimated businesses below $150,000 threshold=100,000
  • Estimated number of filers paying $250 flat amount=37,000
  • Estimated filers paying corporate activities tax rate =18,000
  • Percent of corporate activities tax paid by filers with gross receipts above $25 million=74 percent
  • Percent of corporate activities tax paid by filers with gross receipts above $100 million =55.7 percent

Strategies to minimize pyramiding, i.e., tax imposed at each sale within a single, closely related chain of entities.

  • Keep rate low and base broad.
  • Exempt transactions among closely related business entities.
  • Exempt qualified distribution centers.

Personal income tax adjustments targeted at low income households

  • Expand earned income tax credit.
  • Lower bottom personal income tax rates.
  • Increase standard deduction.
  • Increase personal exemption credit.
    (Legislative Revenue Office 5-2-17).

 

Estimated Oregon Commercial Activity Revenue:
At a rate of 0.25 percent: 2017-19 $948M; 2019-21 $1.469B; 2021-23 $1.543B
At a rate of 0.5 percent: 2017-19 $1.883B; 2019-21 $2.960B; 2021-23 $3.067B
At a rate of 0.75 percent: 2017-19 $2.82B; 2019-21 $4.371B; 2021-23 $4.592B

With a more specific proposal now on the table, the Joint Tax Reform Committee will begin its hard work.

Transient Lodging Tax Information Sharing: Good Bill, Will Pass

The bill that would authorize the Department of Revenue and local governments to disclose to each other information related to administration of transient lodging tax laws is heading to the Senate floor for final passage. House Bill 3180A will improve collaboration and information sharing, which will likely improve collection and enforcement of transient lodging taxes. April 10th, HB 3180A passed the House without a no vote.
May 1st the Senate Finance & Revenue Committee sent it to the floor with a “do pass” recommendation on a vote of 5-0.

Contributed by: Gil Riddell | AOC Policy Director