SALEM — Certain types of state business taxes could raise enough additional revenue that match the state’s projected budget shortfall of nearly $1.8 billion, according to an analysis from Oregon’s nonpartisan Legislative Revenue Office.
But those estimates come with serious caveats. They don’t take into account behavioral responses in the broader economy. They also don’t account for other adjustments to taxes that legislators could make in exchange for instituting a new or higher tax on business.
Those catches encapsulate the challenge of crafting the state’s tax policy, a political battle that’s taking shape this session.
The shortfall is the gap between expected revenue for the upcoming two-year budget cycle and what is needed to fund state services at current levels, according to the Democratic chairs of the state legislative budget-writing committee.
Prior to the start of the session Republicans said that they’d be willing to consider revenue reform in exchange for cutting the costs of state government. One target of their ire is the state’s public pension system.
Legislators on the House Revenue Committee — the chamber where revenue-raising measures have to start — spent last week and Monday reviewing different types of taxes that could, if passed, replace or alter the current business tax structure.
Some of those taxes were included in a Legislative Revenue Office analysis of estimated revenue from various types of taxes last week, which officials were quick to say was not a policy proposal.
Revenue officers estimated that if the Legislature increased the corporate income tax rate to 20 percent, they could raise more than $2.8 billion in the 2017-19 budget cycle.
The state’s tax rate on corporate income is currently whichever is greater: a minimum tax on relative sales or 6.6 percent tax on taxable income, for companies making up to $1 million, or 7.6 percent tax for companies making more than that, according to Business Oregon.
In the upcoming biennium, the corporate income tax, at its current rates, is projected to bring in about $1.03 billion.
But, as Legislative Revenue Officer Paul Warner told legislators last week — in something of an understatement — a 20 percent corporate income tax would probably result in “some feedback” from the business community.
The state’s general fund is largely dependent on the income tax, which generally swings up and down with the economy. Some proponents of revenue reform claim the amount businesses contribute to the state’s revenue pool is too little and has shrunk in recent decades.
Corporate income taxes are one subset of business taxes.
There’s a “menu” of options available when it comes to business taxes, says Warner, and states from New Hampshire to Ohio have a different array.
Each type of tax comes with varying consequences in terms of the state’s revenue volatility, administrative complexity and prices on goods and services.
The revenue office last week also presented figures last week to lawmakers on a business privilege tax and a value-added tax.
A business privilege tax is considered an excise tax and levied on the “privilege of doing business” in the state.
Under the Legislative Revenue Office’s analysis, estimates of revenue that such a tax could bring in range from $744 million to $2.8 billion in the upcoming biennium, depending on the threshold for inclusion.
Again, those estimates don’t acknowledge what consequences the institution of such a tax might have on the economy or other changes that legislators could make in combination with those changes, such as eliminating the corporate income tax.
A value-added tax is charged whenever value is added to a product. It can be calculated in different ways, but by one calculation method, it is based on gross sales receipts minus the cost of a business’ purchases from other businesses. The Legislative Revenue Office said, with a $1 million sales threshold, a rate of 1 percent could bring in $1.33 billion or, at 1.5 percent, nearly $2 billion.
With a gross receipts tax, some legislators have expressed concerns about “pyramiding,” or the phenomenon where the cost of goods grows with every step in the supply chain, and eventually trickles down to the consumer.
The amount of pyramiding depends on the good that is being sold, though, according to Warner. Some products, such as agricultural commodities, require more processing. In Nevada, businesses purveying those types of goods are taxed at a lower rate than those selling services such as entertainment.
While a value-added tax has a broad base by incrementalizing charges and minimizes pyramiding, it is uncommon and can put exporters at a competitive disadvantage, according to the Legislative Revenue Office.