Understanding the Implications of Oregon Measure 118: A Massive Tax Increase and Budgetary Challenge

Oregon Measure 118 proposes to generate an impressive $8 billion annually, with estimates approaching $10 billion within five years. However, it’s expected to reduce the state’s general fund by $2 billion annually within the same timeframe. This seemingly contradictory situation arises from the unique structure of the proposed taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. hike, resulting in Oregon’s largest-ever tax increase creating a considerable budget shortfall.

The Mechanics of Measure 118’s Gross Receipts Tax

The new gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and applies to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding., under Measure 118, directs all revenue to rebates for Oregon residents. This allocation covers the cost of the rebates, administrative expenses, and a “hold harmless” clause. However, challenges arise from: (1) replacing current revenue streams that feed into the general fund; (2) double obligations due to revenue transfers with unavailable funds; (3) changes in existing tax calculations leading to decreased collections.

Impact on Corporate Excise Tax

Currently, Oregon’s S corporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders then pay individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax. excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. comprises a tax on net income and an alternative minimum tax for corporations with low profitability. A staggering 95 percent of revenue stems from the net income component.

Advocates for Measure 118 argue that the minimum tax proves businesses pay minimal taxes, with a cap of $100,000. However, this cap only applies when a business is unprofitable. Profitable businesses would face significant tax burdens, highlighting the disconnect in perception.

Repercussions of Replacing the Minimum Tax

Under the measure, the current minimum tax framework would transition to a 3 percent gross receipts tax for large entities. For instance, a business with gross sales of $100 million would owe $2.75 million, regardless of profitability. Industries with thin profit margins, such as groceries, would confront taxes surpassing net income.

The Oregon Legislative Revenue Office forecasts a flip in corporate excise tax revenue sources, with only about 5 percent deriving from net income versus the previous 95 percent.

Thus, $927 million previously allocated to the general fund will redirect to rebates, increasing to $1.1 billion by 2030. Almost half of businesses subject to the new minimum tax are currently unprofitable, underscoring the stark financial shifts.

Exponential Tax Increases for Various Industries

Analysis suggests corporate taxes for wholesale and retail will jump by 840 percent, with construction taxes climbing over 1,000 percent. Utilities could see a staggering 1,901 percent rise, while health care taxes would more than octuple.

Transportation presents additional constitutional concerns, raising questions about potential requirements for reallocation to the Highway Fund. While reassessments suggest this may not be necessary, legal disputes remain possible, risking significant financial impact.

Educational Impacts of the Corporate Tax Kicker

The measure creates further complications with the “kicker” law, potentially diverting an extra $1.3 billion from the budget in its initial year to K-12 education due to forecasted corporate revenue discrepancies.

Long-term revenue over-forecasting would necessitate further education fund transfers, absent corresponding revenue. The state might sacrifice other budget facets to account for this shortfall.

Additional Fiscal Impacts and Broader Economic Consequences

Insurance tax collections could decrease by $70 million annually, alongside an individual income tax decline of over $100 million due to S corporation entity-level taxation adjustments.

The economic ripple effects could further reduce existing tax receipts by $275 million by 2030. Although modeled conservatively, the true economic downturn likely surpasses these projections, indicating broader consumption tax-like impacts due to tax pyramiding in production.

Challenges of the “Hold Harmless” Provision

The brief yet impactful Measure 118 includes a complex “hold harmless” clause, safeguarding federal benefit eligibility loss due to rebate checks. Implementing this across programs like SNAP, Medicaid, and SSI requires intricate calculations and could extend beyond state capacities.

Conclusion: A Recipe for Financial Challenges

Oregon Measure 118 presents vast challenges, claiming to boost tax revenue by $8 billion while potentially creating a $2 billion budget deficit. The measure’s sweeping changes threaten economic stability, increasing taxes exponentially and disrupting corporate tax structures.

To stay updated on tax policies affecting you, subscribe for insights from our experts delivered directly to your inbox.

Share

Twitter
LinkedIn
Facebook
Email