Although several tax reform proposals are sprouting up in the Capitol, one has risen to the top. It is the House Republican’s “Oregon Investment and Stability Plan (OSIP). For a video explanation click here.
OSIP has five components:
1. Keep Corporate Kicker Money in Oregon.
The Corporate Kicker is the amount of tax dollars that revert back to corporate taxpayers when corporate income tax payments are 2% higher than budgeted. When the economy grows during an economic recovery and corporate tax payments are 2% more than expected, the excess becomes a credit for corporate taxpayers, unless the Legislature says otherwise. Since Oregon’s corporate tax payments are forecast to exceed the Corporate Kicker threshold by $275 million, the Legislature must decide whether to refund that amount or use all or part of it to establish a true Rainy Day Fund, to help prepare for the next recession.
There are some who say keep the money and some who say send it all back. Wisdom dictates the corporate tax kicker credit should remain in Oregon. Thus, the Corporate Kicker issue should be carefully considered. Let’s begin with a quick review of which corporations pay corporate taxes and which do not.
There are two basic types of business corporations””the Subchapter “S” Corporation and the “C” Corporation. “Sub-S” corporations are usually small, closely-held, personal corporations. They are taxed on their shareholders’ personal income tax returns, so the corporate kicker has no affect on Sub-S corporations. Chapter “C” Corporations are “for-profit” corporations that sometimes have hundreds of thousands of shareholders. In Oregon there are more than 34,000 C-Corporations, and only 889 have annual taxable income that exceeds $500,000. Those 889 corporations are some of the largest tax payers in Oregon. Out of the 34,000 Oregon C-Corporations, the top 889 would receive $240 million out of the $275 million of Corporate Kicker refund money. Many of these top 889 C-Corporations send their profits outside of Oregon, and often outside of the USA. To keep Oregon corporate tax dollars in Oregon, OSIP proposes returning the Corporate Kicker to all C-Corporation tax payers, except for the top 889. As a result, OSIP will retain in Oregon $240 million of corporate tax dollars, which can be used to fund the new Rainy Day Fund, discussed below.
2. Realign Minimum Corporate Tax Rates.
Oregon charges corporate income and capital gains taxes with a minimum annual tax . Since 1931 that minimum corporate tax has been $10. OSIP will raise the corporate minimum tax for small, inactive or unprofitable corporations with Oregon sales between $0-50,000 to $25. The minimum tax will increase according to a schedule in relation to higher sales up to a top level of $50,000 for huge corporations with annual Oregon sales exceeding $25 million. OSIP’s proposed “sales-based” annual corporate filing fees will generate an additional $153 million for the 2007-09 biennium.
3. Reduce Personal and Corporate Capital Gains Taxes. Capital Gains Taxation is a brutal weapon against the middle class. We work our whole lives, struggling to pay our debts and save for retirement. We invest in retirement plans, and use after-tax-dollars to invest in mutual funds or a few carefully selected growth stocks. If we are fortunate our investments appreciate over time. Then judgment day comes when we sell those investments and see the tax bill””the Capital Gains tax bill on all appreciation that occurred over the time we held the investments.
The government does not give us a deduction to compensate for the 3 to 4% average inflation rate that eats away at the buying power of our investments. Currently, in Oregon the personal Capital Gains rate is a cruel 9%, the same rate charged on wage and salary income. The Corporate Capital Gains rate is 6.6%.
OSIP will help our retired seniors and middle class Oregonians by lowering the personal Capital Gains rate to 7% and the corporate rate to 5%. The money saved by the lowered Capital Gains rates will benefit Oregon’s economy where the extra money helps pay for Oregon products, jobs and services. The total cost of lowering the Oregon personal and corporate Capital Gains rates would be $214 million.
4. Protect Small Family Farms & Businesses from Forced Death Tax Liquidations.
For several years in the 1980’s I dedicated my law practice was devoted to estate and business tax planning. As a small town country lawyer I represented farmers and small business owners who were concerned about the high costs of inheritance and estates taxes when they died. Their concerns were justified. Every estate planning attorney can tell tales of bereaved families who were forced to sell the family farm or business to pay state “inheritance” or federal “estate” taxes. There is something inherently wrong with spending a lifetime working on the family farm or building a family business, only to have it shut down and sold to pay “death taxes.”
I remember being contacted by a group of art instructors from a successful art college in Ashland, Oregon. They told me how the owner of the art school had died, and the college had been summarily shut down leaving both art students and faculty members sitting on the curb. There were several reasons why this happened and none of them were good. With proper planning and good tax reform legislation, this kind of tragedy can be avoided. OSIP will help by increasing the “inheritance” or “death tax” threshold from $1 million to $2 million. The $2 million figure will bring Oregon in line with the federal estate tax exclusion amount, which is also $2 million. The loss of revenue to Oregon over the next biennium from increasing the inheritance tax threshold is expected to be $43 million.
5. Create a true Rainy Day Fund.
Most candidates made a promise during last year’s campaigns to create a true Rainy Day Fund. Now it is time for the Governor and Legislators to make good on that promise. OSIP makes good on the promise to create a true Rainy Day Fund. By taking only one percent ($126 million) from the forecasted 2007-09 Revenue ($12,602 million), and adding it to the $240 million retained from the 889 highest tax paying “C” corporations, $366 million can be placed in a new Rainy Day Fund that can only be touched with a “super majority” 3/5 vote of both the House and the Senate. Even with a 3/5 vote the Rainy Day Fund cannot be tapped unless there exists the same economic downturns required to tap the Educational Stability Fund–Oregon’s other rainy day fund. Thus, between the ESF and the new Rainy Day Fund, more than $817 million can be set aside in 2007-09, to prepare for the next economic recession.
In summary, by analyzing the attached chart we see the Total Additional Revenue generated in the 2007-09 biennium from the “Suspended 2007 Corporate Kicker” and the “Increased Minimum Tax (or more correctly Increased Corporation Registration Fee), on “C-corporations,” is $392.6 million.
On the Reduction side of the ledger, we reduce 2007-09 revenues by the following: $366 million to fund the new Rainy Day Fund; $43 million in reduced death taxes; and, $214 million in reduced personal and corporate capital gains taxes, for a total reduction from the budget of $622.6 million.
Thus, the net cost from the $14.9 billion 2007-09 biennial budget is only $230 million””a small deduction from the 20% increase in forecasted state revenues. Clearly, the many benefits for Oregon citizens from the Tax Overhaul Plan make the Oregon Stability & Investment Plan a top priority for this Legislative Session. A summary of this plan is available online.