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Oregon Tax Proposal Threatens Jobs Nationwide

Posted: March 31, 2016 at 8:00 am   /   by

The Cascadia Subduction Zone off the Oregon coast has been much in the news recently.  Seismologists are anticipating a massive, 9.0 quake at any minute. It would devastate Oregon and its closest neighbors to the north and south, first with a massive quake and then with the tsunami that would follow. While we have no idea when this could occur, another kind of quake, this one economic and political, could occur in Oregon on Election Day, and its effects would undulate across the nation, impacting all C Corporations with gross sales of $25 million and higher earned in Oregon.

The epicenter is Initiative Petition 28 (IP 28), which union forces are trying to get on the ballot in November. In order to to get it there, OurOregon.org, a site run by unions, and ABetterOregon.org, the benign name that has been given to the initiative, must get 88,0000 signatures by July of this year. They claim to have 66,000. But the signatures are less important than is public support for the measure.

According to BlueOregon.com, and OregonLive.com, recent polls show that IP 28 has has 60% support of Oregon voters, although that number is likely to fall at least some. If it passes, it will unleash a unique form of taxation that is potentially ruinous to Oregon’s economy and it could also result in job losses in large C Corporations nationwide. The IP is aimed at increasing taxes to fund education and services for the elderly.  But the real agenda is well-hidden, unless one knows where to look.

While the exact wording of the new plan is being challenged by both sides, proponents claim it will force C Corporations to pay their “fair share” of taxes. “Fair share,” the red-hot, redistributionist battle cry, ordinarily aimed at the “1%” of personal-income earners,  has large corporations in its sights.

But, according to accounting firm, Moss Adams, “Organizations that purchase products and services from C corporations would need to increase their price for items resold to Oregon consumers. In response to this, businesses purchasing goods in Oregon may opt to leave the state or relocate some or all of their facilities to avoid the increased cost of doing business in the state. The Legislative Revenue Office, in evaluating similar proposals to IP28, has forecast job losses should a gross receipt tax pass.”

Thus job losses would affect companies in Oregon and those nationwide.

“New Tax on Gross Sales, Not Profits”

According to The Oregon Business Association, which is opposed to the measure, “Under IP28, all C-­corporations with Oregon sales in excess of $25 million would be subject to a new minimum tax rate of $30,001, plus 2.5% of gross Oregon sales over $25 million annually. Because it’s a tax on gross sales–not on profits–businesses would be forced to pay the tax regardless of whether they make a large profit, small profit, or no profit at all. That would unfairly punish hundreds of businesses with high sales and low profit margins, such as grocery stores, construction businesses, automobile dealers, restaurants, pharmacies, hardware and other retail stores, and many others.”

What does this mean? IP 28 mandates that C Corporations (nationwide), if profitable, would have to pay the state’s income tax on income derived from Oregon, plus sales made in Oregon totaling $25 million or more, in addition to a minimum tax of $30,001 plus 2.5% of all gross sales earned in Oregon, according to the Oregon Business Association. But here’s the kicker—and what makes the concept of “fair share” more like “rip off”—C Corps that report annual losses under the IRS laws and rules would nonetheless still have to pay the minimum tax on Oregon earnings plus the 2.5% on sales of $25 million or more and there is no cap. In the chart listing the taxes below, if a C Corp reporting net losses but had sales of $400 million, they would have to add almost $10 million to their loses, although that amount could be deducted from the company’s federal tax returns.

But IP 28 represents one of the most dangerous and potentially ruinous taxes anywhere in the world. Why? If Company A has Oregon sales of $400 million, but records a net pretax loss, it must still pay Oregon $9,405,001 (See Chart 2 below) because the tax is based on Oregon sales, not total earnings.

Many economists, lawyers, accountants and business organizations fear that this could extend to all other kinds of business forms, including S Corporations, Limited Liability Corporations (LLC) and ultimately, nonprofit corporations, which, due to this ruinous tax, could be forced to end programs that help people most in need of them and result in substantial job losses, unless the cost of this tax is passed on to consumers, something most corporations are loathe to do.

Making the situation even more volatile the  Oregon Business Association offers an excellent analysis below, including how this could morph into an insidious value-added tax (VAT) or a punishing sales tax under certain circumstances.

VAT 2

Chart 1. This shows how a sales tax will hurt consumers. It’s structured much like a Value Added Tax (VAT) used in European models. Source: The Oregon Business Association

Who is behind IP 28?

Defined in terms that are deceptively innocent, this concept was conceived by OurOregon.org, a website that offers its support for “A Better Oregon” in seemingly innocent terms. The organization claims those supporting it comprises “parents, teachers, small businesses, leaders and organizations who have come together to make sure we get the schools and services we need…”

At first blush, who can argue with what sounds like a white-picket-fence, community-based group of people, organizations and leaders coming together to improve schools and provide services to the elderly population?

It sounds laudable, but it all changes when you read the rest of that sentence: “…by making large and out-of-state corporations pay their fair share in taxes.” There they go again with fair share.

“…large and out-of-state corporations.” (It’s important to understand that in-state corporations will also have their knees scraped by this tax.)

Debate on IP 28

How Do Corporations Deal with a Tax Like This?

There are several ways national corporations handle such punishing costs. All too often they cut jobs, and that means jobs not just in Oregon, but nationwide. Granted, a $10 million additional loss would not be catastrophic (especially if it’s deductible on a federal tax return), except for those corporations losing their jobs. But what happens if this very lucrative scheme were to bleed into Washington State, then California and…? It threatens to end the capitalist system as we know it.

TAX TABLE

Chart 2. New tax table showing amounts due from $30 million to $400 million. Source: Gibson Law Firm of Portland, Oregon in its petition to change the language of the measure.

For the sake of simplicity, let’s stick with $400 million in sales example in all three states. That means the company now has a tax liability of roughly $30 million ($10 million from each state) whether they realize a profit or loss. If it reports say $100 million in losses for the year, the $30 million is added to that loss for a total of $130 million. That means significant job losses because trying to pass the taxes on to consumers in that amount will only result in lower sales, especially in an already sluggish economy.

Gibson Law Firm of Portland, Oregon, calculated how the new system would work in a letter it filed with the Oregon secretary of state (see Chart 2 above). It isn’t until a corporation’s sales hit $25 million that this added burden kicks in.

To be fair,  in Oregon, the idea is to use the tax-generated windfall to fund education and services for seniors. While that is indeed noble, forcing corporations to pay the tax on sales, not profit, poses a threat to the overall economy, especially if this spreads to other states. So, is funding Oregon’s educational system and providing more services to seniors worth the potentially harmful effects of laying off hard-working bread winners in other states?

Organizations opposing IP 28 believe there is nothing fair about it. The Oregon Business Association and numerous chambers of commerce point out that it could very well result in business contraction in Oregon, especially for companies operating on slim profit margins to begin with. That’s especially the case with supermarket chains, which typically struggle to find profitability on operating margins of 1.5%.

The Real Agenda

Digging deeper and peeling away the layers of this story yields the real agenda, and it’s not the magnanimous gesture by unions interested in raising additional tax revenues for education and services for the elderly. Simply stated, Our Oregon is absolutely obsessed with the destruction of the Koch brothers.

Who are these allegedly nefarious scions of industry? According to USA Today, “When people talk about the ‘Koch brothers,’ they almost always are referring to Charles Koch and his younger brother, David, whose activism on behalf of Republicans has made them among the most powerful people in American politics.” They are among the most hated by those on the left, who conveniently ignore the fact that billionaire and convicted felon George Soros funds a good many far-left concerns, in particular the uber-liberal, flame-throwing site, MoveOn.org.

A search for “Koch bothers” on OurOregon.org site yielded 31 articles that at least make mention of the Kochs.

That was enough to alarm Oregon Republicans, who are trying to head this off at the pass through legislation. The problem is the session for 2016 expired on March 3.  Were it still in session, it had a great deal to deal to do within a very short span of time (the length of the legislative session in 2016 was from February 1st through March 3, is from days and it couldn’t add time to debate and finalize a statute addressing the new corporate taxes.

TheStatesManJournal.com, which covers the Oregon Legislature, reports that Sen. Mark Hass had developed a proposal to increase corporate taxes, but in a much less onerous way.  “The plan would scrap Oregon’s corporate income tax system in favor of a 0.39 percent Commercial Activity Tax, or CAT, modeled after Ohio’s system. It would also cut taxes for households earning $58,000 or less, double the personal income tax deduction and raise the earned income tax credit to 18 percent of the federal EITC (earned income tax credit) level.”

While Senate Democratic leaders agree there is support for the Hass plan, the Senate Majority Leader Ginny Burdick, a Democrat, poured water on it. “There just has not been the kind of interest that you need to make a move like this and have it succeed. It just does not exist right now.”

LEGSLATION

While the door to legislation has closed, other groups are lining up in opposition. What this proposal does is tell a company, “We know you reported a loss on your federal return, but too bad. You still have to pay us a minimum tax and 2.5% on sales above $25 million as the cost of doing business in Oregon.”

Obviously, that is not sitting well with such giants as Nike, which is headquartered in the state.

Under the proposal, a company that had total sales of $400 million in Oregon will have to pay $9,405,001 (see chart below). That means a sales tax of almost $10 million, which gets added to its losses, is passed on to consumers or costs innocent people their jobs.

Unconstitutional If It Passes

In its letter of objecting to the wording of IP 28, Gibson Law Firm, Portland Oregon points out that in Article IX, Section 4 of the Oregon Constitution,”No money shall be drawn to the Treasury but in pursuance of appropriations of the law.” In other words, without an appropriation made by the legislature to earmark the money raised by this tax to education or care of the elderly, it goes to the general fund, and is, according to Gibson, is unconstitutional. If that is the case, it opens a broad doorway to lawsuits by C Corporations inside and outside the state. That means that because IP 28 stipulates that the moneys raised by the tax will go to education and elderly care. that cannot happen until the Legislature, which meets again in 2018, passes legislation that would move the funds from the the General Fund to the Education and Elderly Care budgets through an appropriation.

That means that voters believing that IP 28 will mean the initiative expressly provides that the taxes raised will got to fund education and elderly care may be duped into voting for an unconstitutional measure, which makes it utterly challengeable in court because the the ballot measure will be misrepresenting the facts to voters. Stay tuned. This is going to get interesting. We will bring updates as they become available.

 

James Hyde

James Hyde began his journalism career as managing editor of Financial Computing and Analytical Instruments and Computers magazines. He later became managing editor of United States Banker magazine, and won a Jesse H. Neal Award in 1986. Since then he has written one book and two syndicated columns that were circulated worldwide. He is a political analyst and has worked for a number of major political figures. While he writes on politics in general, he specializes in national security.

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Oregon Tax Proposal Threatens Jobs Nationwide