In November, Oregon voters voted down a ballot initiative that would have imposed a new business tax on Oregon corporations known as a gross receipts tax (GRT). This levy would have been added on top of all existing business taxes and would have charged Oregon firms 2.5 percent for all sales in excess of $25 million. Despite voters’ clear rejection of a gross receipts tax, Oregon’s state legislature has considered several new gross recipient tax proposals to cover the state’s $1.6 billion budget shortfall.
A gross receipts tax 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.
A new proposal introduced in early May would implement a gross receipts tax in combination with an income tax cut. The GRT would replace the current corporate income tax in 2018. Companies with less than $150,000 in Oregon sales would pay nothing while businesses with more than $150,000 in sales but less than $1 million in sales would pay a flat rate of $250. Businesses with gross receipts of more than $1 million would pay the $250 tax, along with an additional tax that would be based on a percentage of the sales earned.
This rate is still under negotiation, but according to Oregon Public Broadcasting, “a sheet listing possible revenue estimates used a variety of tax rates that ranged from 0.25 percent to 1 percent.” No details were given on the income tax cuts.
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.
In the Tax Foundation’s “State Business Tax Climate Index,” Oregon currently ranks 37th among the 50 states on the corporate income tax subcomponent, wrote Kaeding in a Fiscal Fact piece. When Kaeding analyzed the previous GRT proposal, she determined a gross receipts tax would make Oregon the state with 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 a 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.”
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 receipts tax, because voters have rejected the tax, it would complicate the tax code, and it would disincentivize in-state investments.
The following documents examine gross receipt taxes in greater detail.
Another Day, Another Gross Receipts Tax Proposal in Oregon
https://taxfoundation.org/another-gross-receipts-tax-proposal-oregon/
Nicole Kaeding of the Tax Foundation examines a gross receipts tax proposal in Oregon and argues it is a flawed, outdated type of taxation.
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.”
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 and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
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Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
