In November, Oregon voters will consider a ballot initiative that would impose a new business tax on Oregon corporations known as a gross receipts tax. The new levy would be added on top of all existing business taxes and would charge Oregon firms 2.5 percent for all sales in excess of $25 million. The tax is expected to generate $5 billion per biennium, representing a 440 percent increase in Oregon corporate income tax collections.
A gross receipts tax (GRT) is a tax on all business sales of any business subject to it, regardless of the firm’s profits or losses. Unlike corporate income taxes and sales taxes, gross receipts taxes apply to all transactions, including intermediate business-to-business purchases of supplies, raw materials, and equipment. This creates “tax pyramiding,” the layering of taxes at each stage of production. The result is higher costs to consumers, who often have no idea how much tax they ultimately pay for their purchases. That violates the good-government principle of transparency.
If the gross receipts tax becomes law, Oregon would join five other states implementing such a tax, and Oregon’s GRT would be far higher than any other existing GRT. According to Nicole Kaeding of the Tax Foundation, Oregon’s corporate tax structure is already uncompetitive, which means this new tax would amplify the state’s already substantial tax problems.
“The state ranks 11th best overall on the State Business Tax Climate Index, but is buoyed by its strong performance on the sales tax and property tax variables. It currently ranks 37th among the 50 states on the corporate income tax subcomponent,” wrote Kaeding in a Fiscal Fact piece. “If this proposal is adopted, Oregon will fall to 50th on the corporate income tax subcomponent and 17th overall, and the proposed gross receipts tax will give Oregon the worst corporate tax climate for businesses in the country.”
Steve Buckstein, founder and senior policy analyst at the Cascade Policy Institute, argued in an October 2015 article for the Cascade Business News most voters do not realize the real burden a GRT would have on businesses. “A 2013 national poll found that Americans believe the average company makes a 36% profit on sales after taxes. The actual median and mean profit margins of 212 industries nationwide are 6.5% and 7.5% respectively,” Buckstein wrote. “So, imposing a 2.5 percent tax on gross sales actually represents at least one-third of the average company’s profit margin.”
The substantial hit a GRT would have on businesses will inevitably be passed on to consumers and workers through increased prices and pay or benefits cuts. A report released in May by Oregon’s Legislative Revenue Office found the GRT would “reduce Oregon employment growth by more than 20,000 jobs between 2017 and 2022. It would reduce growth of private-sector employment by more than 38,000 jobs in that time but increase the growth rate of public-sector work by nearly 18,000 jobs.”
Both new and small businesses are especially vulnerable. Steve Stanek, research fellow at The Heartland Institute, argues in a Research & Commentary GRTs such as the one being considered in Oregon tend to be regressive and disproportionately harm entrepreneurs. “The effect of gross receipts on businesses, and consequently on economic growth and job creation, is worse than conventional corporate income taxes,” wrote Stanek. “Firms with low profit margins, which presumably are least able to pay higher tax, perversely pay higher effective tax rates than firms with high margins. This is harmful to new businesses, which often start out with little or no profit.”
The increased costs generated by GRTs are very harmful to economic competitiveness and a state’s ability to attract new businesses. Oregon should reject a gross receipt tax; it complicates the tax code and disincentivizes in-state investments.
The following documents examine gross receipt taxes in greater detail.
Ten Principles of State Fiscal Policy
https://heartland.org/publications-resources/publications/ten-principles-of-state-fiscal-policy?source=policybot
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Initiative Petition 28 Description and Analysis https://olis.leg.state.or.us/liz/2015I1/Downloads/CommitteeMeetingDocument/90401
This report from Oregon’s Legislative Revenue Office provides a summary and analysis of the proposed gross receipt tax and how passage of the measure would affect Oregon’s revenue system.
Tax Pyramiding: The Economic Consequences of Gross Receipts Taxes
http://www.taxfoundation.org/research/show/2061.html
This study by the Tax Foundation explains why gross receipts taxes are poor tax policy. The author notes that GRTs lead to harmful “tax pyramiding,” distort companies’ structures, and damage the performance of state and local economies.
Assaulting ‘Corporate Profits’ Will Hit Average Oregonians
http://oregoncatalyst.com/32070-assaulting-corporate-profits-hit-average-oregonians.html
Steve Buckstein of the Cascade Policy Institute discusses Oregon’s proposed gross receipts tax and the potential negative impact it will likely have on middle- and low-income Oregon taxpayers. “Proponents of this huge tax increase know full-well that they won’t be blamed when consumer costs rise and workers see pay and/or benefits restricted. The tax will be hidden from them. They’ll blame those evil businesses that they think are gouging them, without looking into the real culprits,” wrote Buckstein.
Oregon’s Gross Receipts Tax Proposal Would Hurt Job Creation
http://taxfoundation.org/blog/oregon-s-gross-receipts-tax-proposal-would-hurt-job-creation
Nicole Kaeding of the Tax Foundation examines the possible impact Oregon’s proposed gross receipts tax would have on job creation. “In total, the [Legislative Revenue Office] estimates that Oregon would lose 20,400 jobs due to [the gross receipts tax], while wages would increase slightly. This should not be construed as a positive development. The net loss of jobs means fewer opportunities for workers, particularly lower-wage and lower-skill workers,” Kaeding wrote.
Oregon’s Gross Receipts Tax Proposal Would Be the Largest Tax Increase on Residents in the State’s History
http://taxfoundation.org/blog/oregon-s-gross-receipts-tax-proposal-would-be-largest-tax-increase-residents-state-s-history
Nicole Kaeding of the Tax Foundation analyzes the Oregon gross receipts tax proposal and how it compares to other tax hikes. “The [Legislative Revenue Office] doesn’t state this, but we’ve pulled the historical revenue information, and that means that [the gross receipts tax] would be the largest state tax increase in Oregon’s history,” wrote Kaeding.
New $275 Million Tax Increase Unveiled this Week
http://www.oregonprosperity.org/page.asp?content=13_Tax_Increase&g=OREGON
The Oregon Prosperity Project discusses the gross receipts tax proposal and the effect it could have on the state’s economy. “The new tax proposal will hurt Oregon’s housing industry (by eliminating the mortgage deduction for the Measure 66 taxpayers) and the new gross receipts tax will cripple Oregon’s major employers that are high volume/low margin. In the bigger economic picture, these taxes won’t create any jobs. In fact, they will only hurt Oregon’s economy,” wrote the Oregon Prosperity Project.
The Texas Margin Tax: A Failed Experiment
https://heartland.org/publications-resources/publications/the-texas-margin-tax-a-failed-experiment?source=policybot
Scott Drenkard of the Tax Foundation reviews the timeline of the adoption of Texas’ margins tax, which is a kind of gross receipts tax. Drenkard examines “the calculation procedures that taxpayers must go through to complete a tax return, and reviews major lawsuits against the Margin Tax, finding that the unique structure of the tax is a problem for taxpayers, legislators, and judges.”
Overview of State and Local Taxation
https://heartland.org/publications-resources/publications/overview-of-state-and-local-taxation?source=policybot
Ethan D. Millar of Alston and Bird, LLP provides in this briefing an overview of basic state and local tax rules that apply to general business operations and common business transactions, such as mergers and acquisitions. Millar focuses on income and sales/use taxes, but he also briefly discusses real-property transfer taxes, property taxes, net-worth taxes (often called capital stock or franchise taxes), gross receipts taxes, unemployment taxes, wage-withholding taxes, and unclaimed-property laws.
The Fiscal and Economic Impact of a Margin Tax on Nevada
https://heartland.org/publications-resources/publications/the-fiscal-and-economic-impact-of-a-margin-tax-on-nevada?source=policybot
The Nevada Policy Research Institute (NRPI) examines the possible effects of a margins tax on the state’s economy. NRPI commissioned the Beacon Hill Institute at Suffolk University to develop the Nevada State Tax Analysis Modeling Program to identify exactly how changes to the state’s tax laws could alter the decision-making of economic actors. Their findings suggest a margins tax would lower employment, reduce investment, and scale back Nevadans’ incomes.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at http://news.heartland.org/fiscal, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Nathan Makla, Heartland’s state government relations manager, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
