By Eric Fruits
As featured in the Oregon Transformation Newsletter,
Oregon’s Corporate Activities Tax went into effect New Year’s Day. Nine times, Oregon voters have rejected a state sales tax. But this year we ended up with something much worse than a sales tax, and voters had no voice in the matter.
While it’s called a “corporate” tax, the name is misleading. The steep new tax is assessed on all businesses in Oregon – even partnerships and the self-employed. The 0.57% tax on sales is triggered once a business hits $1 million in revenue. Even worse, the CAT is a new tax that is imposed on top of state corporate income taxes already paid by many Oregon businesses.
One million dollars in sales may seem like a lot to a legislator, but many small businesses such as restaurants, auto repair shops, and consulting firms can easily generate $1 million in sales a year. A typical convenience store has about $1.5 million in annual sales, which would result in an increased tax liability of $5,000 or more.
About a quarter of employers in Oregon – 23,000 firms – have sales of $1 million or more a year, according to the Census Bureau. Oregon State University reports farms with sales of over $1 million account for the majority of the state’s agricultural sales. The average Oregon restaurant has about $1 million in sales, according to the National Restaurant Association. In an effort to reach into the deep pockets of so-called “big business,” the CAT is punishing many startups as well as small companies, family firms, and businesses struggling just to make payroll.
One reason the CAT is worse than a sales tax is the process of tax pyramiding. Pyramiding occurs when a good or service is taxed multiple times as business inputs are taxed at each stage in the production and distribution process. This raises the effective tax rate on consumers, who will bear the burden of higher prices for goods and services. Knute Buehler’s website produced a comic showing how pyramiding works in home construction, adding more than five percent to the cost of building a home.
The key problem with a gross receipts tax, such as the CAT, is they do not exempt business-to-business transactions from the tax base. Because of pyramiding, the CAT favors larger vertically integrated firms, and punishes smaller independent firms that purchase inputs from suppliers and other third parties. The tax affects industries differently. High volume, low margin businesses such as retailers will face a higher tax burden than, say, professional services firms.
While the CAT is assessed on businesses, the economic impact of the tax will fall on consumers, workers, shareholders, and business owners. In addition to higher prices imposed on consumers, the proposed tax will result in fewer jobs for Oregonians. The state’s Legislative Revenue Office (LRO) estimates 800 fewer jobs in the first year the CAT is in place. But the number could easily be bigger as several business owners have said they are reconsidering whether they will remain in Oregon.
LRO predicts households at every income level will have less disposable income once the CAT takes effect. In fact, the office concludes that low-income households would have the largest decrease in household income. These Oregonians will be $113 poorer, representing more than 0.5 percent of their disposable income. The CAT is not just bad for business, it’s bad for Oregonians at almost every step of the income ladder. If the state’s economy hits a slump in 2020, you can thank the lump of coal the legislature left us with the Corporate Activities Tax.