Measuring the Measures
Which way on 66 and 67?
By Camilla Mortensen
Taxes suck. And they’re confusing — it was Albert Einstein who once said “The hardest thing in the world to understand is the income tax.” Nobody wants to think about taxes, let alone pay them. But no one knows better than people in Lane County how badly things go wrong when tax-funded services like public safety, jails, schools and human services don’t have enough money.
So will Measures 66 and 67 save Oregon’s already underfunded services from a devastating budget shortfall of hundreds of millions of dollars, or are they “job killing taxes”? Measure 66 is the measure that would raise taxes on the personal incomes of wealthy Oregonians, and Measure 67 would raise Oregon’s $10 minimum corporate tax and raise the taxes on some corporate profits.
Opponents of Measure 66 and 67 would have you believe that 66 + 67 = 666 (that’s three sixes, after all) and that these measures are the job-killing spawn of Satan. Proponents are doing their math a little differently and will tell you that Oregon’s already hard-hit economy is going to tank and already suffering schools are going to go down the drain if these measures don’t pass.
Advocates say the gist of all this is that rich people are going to pay a little more money to help Oregon’s schools, health care and public safety, and businesses are going to pay a higher tax that’s still lower than just about any other state in the nation. And don’t worry, faithful EW readers: According to our calculations, most of you don’t make enough money to have to pay the tax anyway.
So what’s behind all the talk and numbers? You’ve got an almost 100-page Voters’ Pamphlet that showed up in mail this week to guide you through the Jan. 26 special election, but that’s a little overwhelming, so here’s a little shorter introduction to the measures.
Last year, Rep. Phil Barnhart and the rest of the Oregon Legislature’s House Revenue Committee introduced two bills, HB 3405 and HB 2649, in order to prevent budget cuts in the millions to needed services from the police to forestry to veterans’ affairs. But no sooner had the bills been passed by the Oregon Legislature in June and signed into law by Gov. Ted Kulongoski than a group calling itself Oregonians Against Job-Killing Taxes (OAJKT) began raising money for a petition campaign to try to get rid of the measures through a public vote.
The conservative business coalition succeeded in getting more than enough signatures. Now Oregon voters get to decide whether the new taxes go through, while we’re being bombarded right and left with confusing commercials and billboards, and conflicting news coverage.
Barnhart, who chaired the Revenue Committee, says the taxes arose because “we needed a revenue increase in order to balance the budget.” Even with federal stimulus money, the budget was millions short and the state was facing cutting support for everything from prisons to community colleges.
“We looked at current taxes to see how they could be made fairer and raise some money,” Barnhart says.
Barnhart says what isn’t fair about Oregon’s current tax system is that the people who make the least money are paying the highest share of their income in taxes, and the highest-income Oregonians pay the smallest share. Measure 66 is a step towards making things a little more even, advocates say.
Low-income Oregonians pay 8.7 percent of what they earn in taxes while middle-income people pay 7.9 percent. The wealthiest people in Oregon — those who make over $410,000 a year and on average over a million — pay only 6.1 percent of their income in taxes, according to the Oregon Center for Public Policy (OCCP) and information from the Institute on Taxation and Economic Policy.
Barnhart says even with the tax increase, the wealthy will still be paying the smallest percentage of their income in taxes out of Oregon’s income groups,
Oregonians plunged into the ranks of the out-of-work stand to benefit from Measure 66 because it temporarily reduces taxes for state residents collecting unemployment. The first $2,400 of unemployment insurance benefits is exempt from taxes in 2009. This means unemployed Oregonians will pay anywhere from $142 to $179 less on taxes.
If you make less than $125,000 on your own, or $250,000 as part of a couple, Measure 66 won’t affect your taxes at all. As Chuck Sheketoff, OCPP executive director, told EW, “Very few of your readers will have an increase in taxes.” The average household salary of a Eugene Weekly reader is $57,648, according to The Media Audit of 2008, almost $70,000 less than what it would take to earn an increase in taxes.
The Media Audit also says that only 1.3 percent of Lane County residents make over $150,000, so very few Eugeneans, whether they read EW or not, are going to be feeling the tax increase. A report by Oregon’s Legislative Revenue Office says 97.5 percent of Oregonians will not have a tax increase.
The tax increase is not only limited to high-income Oregonians; it is also limited in how much of that person’s earnings it applies to. Rather than the entire earnings, the increase is limited to the money made that exceeds $125,000 (single) and $250,000 (couple). From now until tax year 2011, if a single person makes over $125,000, she’ll pay an addition 1.8 percent on that income that is over $125,000 or an additional 2 percent on income that is over $250,000.
Beginning in tax year 2012, the new tax rates actually drop. The 1.8 percent rate will go down to 0.9 percent for both single taxpayers and couples. So in other words, the OCPP says, if a couple has a taxable income of $260,000 in 2012, they will pay 9.9 percent in taxes — as opposed to the current 9 percent — but only on the $10,000 of their income that’s over $250,000. That means their taxes only go up $90 (.9 percent of $10,000).
Measure 66 also phases out the amount of federal taxes these high-income people can subtract on their Oregon tax returns.
Pat McCormick of OAJKT says the issue with Measure 66 is capital gains. Capital gains are profits resulting from investments into things such as stocks, bonds or property. Wealthier people tend to have more money to invest into stocks or properties and therefore more capital gains.
McCormick says that the measure is the “exact opposite” of what Oregon’s Task Force on Comprehensive Revenue Restructuring recommended. He says the Task Force “recommended focusing on improving the stability of Oregon’s tax system by reducing its over reliance on personal income taxes, especially personal income taxes on capital gains.” He says Measure 66 “dramatically increases the component of capital gains” because upper income taxpayers report more capital gains income. That means he says, “Oregon’s taxes will be more volatile.”
So how is a higher tax on wealthier people a “job-killing tax”? McCormick says that two-thirds of the taxpayers who are affected are small business owners and report their business income through the personal tax system rather than the corporate tax system, “So it’s a business increase for them.” And business increases, Measure 66 and 67 opponents say, translate to employees being laid off.
But Sheketoff, Barnhart and pro-66 and 67 groups like Vote Yes for Oregon, Our Oregon and Defend Oregon disagree. The OCPP points to a study by the Washington, D.C.-based Urban-Brookings Tax Policy Center that says the assumption that taxes harm the business climate is wrong.
“If anything, [the measures] will increase the number of jobs in Oregon, or at least reduce the decline that we’re seeing as a result of this bad economy,” says Barnhart.
The quality of a state’s public services is part of what makes it attractive to people and business, the OCPP says. If cuts are made to education, public safety and health and human services, then moving to Oregon starts to look like a bad idea to businesses considering a relocation to the Beaver State.
Oregon hasn’t raised its corporate minimum tax since 1931. That’s right: Companies have been able to pay only $10 towards Oregon’s schools, transportation, health care and other tax-funded needs since Haile Selassie signed Ethiopia’s first constitution, a gallon of gas cost 10 cents and Donald Duck hadn’t yet become the UO sports mascot.
Measure 67 affects several different kind of business entities: S-corporations; partnerships, limited liability partnerships (LLPs) and limited liability companies (LLCs); and C-corporations.
An S-corporation, Sheketoff says, “is an election you make on your federal tax return.” He says S-corporations have a limited number of shareholders. They can avoid the federal and state corporate income tax and pass through profits to their shareholders to be taxed as federal and state personal income tax. Under state law, they have had to pay a minimum corporate excise tax of $10.
Measure 67 will raise the minimum tax that S-corporations pay from $10 to $150. This might sound like a big leap, but Barnhart says that $150 today has the same purchasing power as $10 did in 1931, making it the same tax level, just adjusted for inflation.
Partnerships, LLPs and LLCs, which Sheketoff says pass profits through to the owners like S-corporations do, will see their tax go from zero to $150. Sole proprietorships still pay no corporate minimum tax.
C-corporations are corporations subject to federal corporate income taxes. All that the S’s and C’s mean in the corporations’ names are references to subchapters of the U.S. Internal Revenue Code. Simply put: C-corporations are classified under subchapter C and S-corporations are under subchapter S.
Until now, the minimum income tax for C-corporations in Oregon was $10, that same low amount set in 1931. According to a study put out by the OCPP last year, 31 corporations with over $1 million in Oregon taxable income paid only the $10 minimum. The study said that 63 percent of all corporations operating in the state paid only $10 in income tax, far less than some minimum-wage families pay in personal income taxes.
How does a corporation that brings in a million dollars manage to only pay $10 in taxes? Sheketoff says, “A corporation can have profits in this tax year but carry losses forward from prior years to offset this year’s profits.” Tax credits like Oregon’s Business Energy Tax Credit (BETC) also reduce the amount, Sheketoff says.
C-corporations will be affected in two main ways by the passing of Measure 67. C-corporations making a signifcant profit will pay an additional 1.3 percent tax on profits above $250,000, dropping to 1 percent in 2011, according to OCPP. As of 2013, only C-corporations with Oregon profits over $10 million would pay the additional tax and the additional revenue from the tax on profits over $10 million will go into the Oregon’s Rainy Day Fund (basically a budget stabilization account).
Measure 67 also creates a new minimum tax for C-corporations based on a sliding scale that is tied to sales in Oregon. This affects C-corporations that don’t have Oregon taxable income that year. If a corporation has less than $500,000 in Oregon sales revenues, it will pay $150. The tax will increase depending upon how much sales revenue a company brings in, with a cap of $100,000 for companies grossing over $100 million. The measure also increases some business filing fees.
The tax on gross sales has some businesses worried. OAJKT’s McCormick gives the example of a car dealership near Portland that he says had “more than $35 million in sales, but they lost money. The net revenue for the year is below zero.” That company, he says, would be facing a $30,000 minimum tax. Measure 67, he says, tells “companies that have no profits: ‘We’re going to tax you up to $100,000 a year for the privilege of losing money in this state.’”
McCormick says the company “is not making money because the economy is terrible, the auto industry is in bad shape,” and, he adds, “they sell a U.S.-made car.”
Sheketoff says that according to a study by the accounting firm Ernst & Young, Oregon has the second lowest business taxes out of all 50 states and Washington, D.C — only North Carolina’s taxes are lower. Even if Measure 67 passes, Oregon will still have among the lowest business taxes in the nation.
According to Barnhart, “These taxes are going to be paid with money that would mostly otherwise be going out of state.” The legislator says that large international or nationwide corporations that pay dividends to shareholders out of state pay three-quarters of Oregon’s business tax. “If we take a very small piece of those profits to pay teachers and others in our budget, that money stays in Oregon and is mildly stimulative,” he says.
Barnhart says, “The nonsense you’re hearing about how this is going to cost jobs is simply not true.”
If Measures 66 and 67 do not go through, Oregon will have to slash funding for LCC, UO, local K-12 schools, the state police, public defense services and water resources, to name only a few things in the Legislative Budget Office’s list of budget reduction options, to make up our $700 million dollar budget shortfall.
As Our Oregon says in your Voters’ Pamphlet, “The right thing to do is up to you.”
Ballots go out to voters on Jan. 8. Election day is Jan. 26.