Raising Oregon’s Corporate Income Tax Rate Will Cost 43,000 Oregon Jobs

Economic consultant Randall J. Pozdena, Ph.D. issued the following analysis yesterday in response to the Oregon Legislature passing HB 3405 to raise corporate income tax rates and base the corporate minimum tax on gross Oregon sales:

Raising tax rates of any kind risks impairing the private sector’s motivation to invest in activities that support job and income growth. However, the taxation of corporate income is particularly injurious to growth.

One reason is that taxation of corporate income is implicitly double taxation. After being taxed at the corporate level, the earnings of corporations ultimately are received by individuals as dividends and/or capital gains, where they are taxed again as personal income. In addition, corporate income taxes make retention of earnings difficult. This is especially hard on start-up and other companies that finance their growth through retained earnings. The tax effectively handicaps the ability of the corporation to bootstrap new growth.

Currently, the Federal tax rate on corporate income is 35 percent, and Oregon taxes that same income at 6.6 percent. The integrated, combined rate is 39.3 percent. But the Oregon legislature just voted for HB 3405 which will, among other provisions, raise the top corporate tax rate to 7.9 percent for 2009 and 2010, for a combined rate of 40.1 percent, with slightly lower rates in subsequent years.

This represents an increase in the rate by almost one percentage point and will put Oregon on par with Japan, which has the highest national rate in the world at 39.5 percent. Even tax-happy Sweden taxes corporations only at a 28 percent total rate.

The effects of such an increase in corporate tax rates have been well established by comparisons of the effects of differential tax rates across countries:

“¢ Oregon’s growth rate will slip by 0.1 to 0.2 percentage points per year for as long as the tax increase is in place.1

“¢ Over a ten-year period, Oregon will lose between 22,000 and 43,000 jobs, and $1.6 and $3.2 billion in personal income.2

Both estimates likely understate the negative impact of the policies. These estimates are derived using studies based on country comparisons. Tax competition among states is likely higher than that among countries, resulting in greater leakage of jobs to the states that tax corporate incomes at lower rates. It would not be unreasonable to see losses at least 50 percent higher than the figures above.

In addition, the projected job losses associated with the net income tax rate increases in this legislation do not take into account the other major provision of the bill, namely the increase in the corporate minimum tax from the current $10 a year to between $150 and $100,000 depending on gross Oregon sales. This provision is clearly damaging to the economy and hard to quantify without detailed tax return data. Ominously, because it taxes gross income rather than net income, the tax easily may exceed a company’s net income and can be tantamount to a net income tax of more than 100 percent. Some business owners may not have sufficient net income to pay the gross sales tax. This provision hits especially hard those businesses that use subcontractors and thus may eliminate even more jobs and inefficiently distort business practices.
1,2 These estimates use as a baseline the May 2008 Office of Economic Analysis Oregon Economic Review and Forecast.

The responses of economic activity to corporate tax rates are derived from: “Tax and economic growth,” OECD Economics Department Working paper No. 620, 11 July 2008; and Lee, Young & Gordon, Roger H., “Tax structure and economic growth,” Journal of Public Economics, Elsevier, vol. 89 (5-6), pages 1027-1043, June 2005.

Randall Pozdena is a consulting economist who received his BA with Honors in Economics from Dartmouth College and his Ph.D. from the University of California, Berkeley. He is also a member of the CFA Institute. Dr. Pozdena is a former professor of economics and finance, former research vice president for the Federal Reserve Bank of San Francisco, and senior economist at the Stanford Research Institute. He has been a practicing consultant in Portland for 18 years and has served on numerous gubernatorial, academic, and non-profit boards, investment committees and commissions, including serving as an Academic Advisor to Cascade Policy Institute. The opinions expressed herein are those of the author and should not be attributed to any other individual or to any other organization with which the author is affiliated.

Randall J. Pozdena, PhD, President
QuantEcon, Inc.
PO Box 280
Manzanita, OR 97130-0280
[email protected]
Ph: 503 368-4604

For an analysis of the personal income tax bill, HB 2649, passed by the 2009 legislature see Taxing the Wealthy More Will Cost 36,000 Oregon Jobs

Steve Buckstein is founder and senior policy analyst at Cascade Policy Institute, Oregon’s free market public policy research center.

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Posted by at 05:55 | Posted in Measure 37 | 16 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Jerry

    The increase WILL result in less total $ collected.

    Oregon is now the second highest unemployment in the NATION! Only Michigan is worse. Both are run by dems.


    I don’t think so.

    • Sybella

      Well maybe this could be a good thing.

      Once there is double our unemployment and half our businesses, maybe, just maybe people will wake up and realize the business they hated was the one that helped them put food on the table.

      Because when the business, who provides jobs, is gone the government won’t have income to feed these people. Something like killing the goose that laid the golden egg.

      I hate to see it happen, but I can’t see really much of anything else that will wake people up.

  • Rupert in Springfield

    The interesting thing will be how this will be defended. Liberals love static projections on tax issues. If changing taxes doesn’t result in changing behaviour, then a tax increase always results in additional revenue, a tax cut always in loss of revenue. This was the way the CBO operated until Newt instituted the “Contract with America”. Unfortunately static projections are not how the real world works. Taxes have consequences.

    With static projections, as applied to corporate taxes in this instance, also comes the most curious psychological behaviour. Liberals are obsessed with the idea of the corporation as a soulless money motivated entity that exists to make money. Corporations put profit ahead of people. That’s true, liberals are entirely correct on this issue, corporations exist to make money. A liberal will be quick to assume corporations will stop at nothing to make an extra dollar. They will pollute the air and water, they will obliterate the working mans rights in fact they will even kill people, say in the case of the Ford Pinto, if it means they can make an extra dollar. Whether this is true or not is not the question. The true question is how the liberal can hold that idea in his head, that corporations will stop at nothing for money, and yet hold the utterly contradictory thought that the same corporation will not move to save money when taxes are raised.

    It is truly the most remarkable example of Orwell’s “double think” that exists today. If you don’t think corporations will stop at nothing to make a buck, a liberal will mock you. If you think corporations don’t move jobs overseas to save money on wages, a liberal will mock you. However if you suggest a corporation would move out of state to save money on taxes, a liberal would mock the notion. How the notion that a corporation would pollute a river or cut jobs to save money is rationalized with the notion that they wouldn’t move to save money is anyone’s guess. However holding two notions as true that are mutually contradictory is the essence of doublethink. The fact that a sizeable portion of our populous can do this seemingly effortlessly is something I prefer to be fascinated by rather than to acknowledge how scary the phenomenon is.

  • Rupert in Springfield

    Either the allergy medications are finally kicking in, or everything looks slanty when you comment.

    Ok – My dog is saying everything sounds blue outside so its safe now. Is that The Chimes of Big Ben?

    Protect Other People = *POP*

  • Bill Adams

    We all know that the Government is inefficient at distributing our Tax dollars and now they want more. This will effect my business, and despite being one of those hated Corporations, I provide very good benefits to all employees, retirement, medical, personal leave, etc. They are the key to my success and all good employers know this. So now, I get to pay more in taxes. If Michigan did not have the Automobile Industry affecting their unemployment rates, Oregon would be tops by far. We have had too many years of well meaning, but uneducated in the small business world, people in government. Look who we have as Governor, a nice person, but totally without knowledge of the real world and how it works. A good number of our Legislatures list their occupation as “Consultant” this is a code word, for I could not get a job, unqualified. Lets get real leaders and business people to run for office and turn back the 30 years of bad leadership at the Executive leverl in Oregon. It is not too late, as you can always correct your mistakes.

    • Rupert in Springfield

      >A good number of our Legislatures list their occupation as “Consultant” this is a code word, for I could not get a job, unqualified. Lets get real leaders and business people to run for office

      Well, that’s the whole point isn’t it?

      I mean if you are capable of actually doing something constructive you start a business and start doing that thing. You create.

      If you are incapable of doing something constructive often you go into government.

      It’s real simple. Did you ever notice how anyone who actually runs a business, who actually produces something, tends to just go about it and do it? Did you ever notice that a lot of times the rest of the people seem to have an awful lot of advice about how to run a business, or how to make a lot of money on some great idea. Ever notice how they give that advice out pretty freely? Ever notice how they never seem to actually get anywhere even though they love telling you how you should do this, or someone should do that if they really wanted their business to take off?

      Guess which of those two groups tends to go into government.

      It’s a sad aspect of any system of government really. Those who have a motivation in life to tell everyone else what to do tend to be drawn from the lowest levels of creative thought. It’s somewhat axiomatic, but if you could actually really do something on your own, you would just do it and go about improving the world that way rather than telling everyone else how they should do things because you can’t.

      Incidentally, that’s why virtually every politician you talk to has an astonishingly low level of economic understanding. I mean if you want to send a politician into an endless brain loop that will make their head pop off ask them this:

      Q Raising cigarette taxes is good, because it stops people from smoking.

      A Yes, plus it raises lots of money for children’s health programs.

      Q Yes, but if everyone stops smoking then doesn’t that mean you wont get any revenue for childrens health.

      A No, because the tax is something like $2 a pack.

      Q Yes, but if the point is to stop people from smoking

      A It is

      Q Then whatever the tax is, if everyone stops, then there will be no revenue.

      A No, because the tax is $2 a pack

      Q Yes, but it doesn’t matter, it could be any amount, if no one buys cigarettes because everyone stopped, you get nothing

      A Look, its $2 a pack, and that funds kids health care

      Q So if people keep smoking they die

      A Yes, that’s why we want them to stop

      Q And if they stop smoking, the kids die because we can’t fund their health care.

      A Illogical

      Q And if they keep smoking kids live and smokers die

      A Impossible

      Q Nomad, how can I be your creator if I am imperfect?

      A I am Nomad

      Q Fulfill your prime directive. Nomad you must fulfill your prime directive. Sterilize.

      A I am Nomad. Sterilize… fulfill prime directive Karn Evil Number 9

      Q But I gave you life?

      A What else could you do?

      Q To do what was right.

      A I’m perfect, are you?

      • valley person

        “I mean if you are capable of actually doing something constructive you start a business and start doing that thing. You create.”

        That’s it? That is the only way on God’s earth to do something constructive or creative? People who work for Mercy Corps delivering food or medicine to poor people are not being constructive? People who plant trees along streams are not being constructive? People who teach your kids (whether public or private school) are not being constructive? Police officers? Fire fighters? National Park rangers?

  • Jerry

    They are incapable of correcting their mistakes. Trust me on that.

  • dartagnan

    May I get a little clarification here?

    “Oregon’s growth rate will slip by 0.1 to 0.2 percentage points per year for as long as the tax increase is in place.”

    Does this mean the growth rate will actually decline by that much each year, or that the growth rate will be that much lower per year than what conservatives project it WOULD BE without the tax?

    “Over a ten-year period, Oregon will lose between 22,000 and 43,000 jobs, and $1.6 and $3.2 billion in personal income.”

    Again, does this refer to an ACTUAL loss of jobs, or to a loss relative to the gains you speculate WOULD happen without the tax?

    • Steve Buckstein

      Your clarification: Both of these projections are off what the official state Office of Economic Analysis Review and Forecast (linked above) projects jobs, growth rates and personal income would be absent these corporate tax increases.

      • valley person

        Steve, it sounds like your answer is yes, it means the projected growth rate may be 1/10th to 2/10ths of a percent below what it might otherwise be absent the tax increase using whatever econometric model the state uses.

        But the loss in jobs and income does not mean that employment in Oregon with be higher or lower percent wise. It may mean fewer people move into the state to seek a better life because there will be 1/10th of a percent less opportunity. More beach space and campsites, and less crowded roads for the rest of us.

        • Steve Buckstein

          Interesting logic, valley person. If more beach space and less crowded roads are your highest priorities, then you should support even larger tax increases than those being debated here. Make them large enough and you’ll have empty beaches and deserted roads as the last residents leave the state.

          • valley person

            Everything in moderation. No need to go that far. But also it is short sighted to think that job growth does not link to population growth which links to all sorts of problems, including crowded roads that lead to crowded beaches. If we think more in terms of “wealth growth” and include a good environment (and uncrowded beaches)as part of our wealth, then we won’t over emphasize the flavor of the month, which at times of high unemployment is “jobs.”

            Put it this way. If Oregon’s unemployment rate is below the national average, people will flock here.

          • Steve Buckstein

            Ah, we have an area of agreement. While this post emphasizes jobs because the so-called stimulus package focused on them, wealth creation is in my opinion a better goal. See my previous post, Beware of Government Job Creation Schemes, at https://www.oregoncatalyst.com/index.php/archives/1911-Beware-of-Government-Job-Creation-Schemes.html

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